Gift letters for mortgages: How do they work?

Gifts for home purchases are more common than you might think. A 2022 report from the National Association of Realtors shows that 12% of all recent homebuyers received a down payment gift from a relative or friend.

But if you’re receiving gift money from a friend or family member to help with a home purchase, your lender may require a gift letter to prove that the money doesn’t need to be repaid.

Key takeaways

• A gift letter provides important details about a homebuying gift and confirms that it’s a gift and not a loan.
• Relatives can usually give a monetary gift to a homebuyer, but people with a possible vested interest in the property—like investors and real estate agents—are among those who can’t. 
• Gift-giving rules vary depending on the type of mortgage loan.

A gift letter is a legal document that certifies that a homebuying gift does not need to be repaid. By signing the letter, the gift giver and recipient are agreeing that the money was a gift and does not need to be paid back. 

A gift letter can also help to show that there is no other underlying motive for the gift. For example, the gift giver can’t be someone with a financial stake in the property—like a real estate agent or home builder—because it could cause a conflict of interest.

A gift letter shows a lender that the homebuyer actually received a gift and didn’t suddenly come into a pile of illegitimate money.

But if a lender can’t pinpoint the source of new money in a homebuyer’s account, the mortgage application could get delayed or even rejected. Why? Because the lender might question whether the buyer has enough money for mortgage payments if the cash is a loan that has to be paid back.

Determine how much you need

Before getting too far into the homebuying process, it might help to figure out how much gift money you might need for a down payment or other home purchase expenses. And keep in mind that your credit score might affect the amount of your down payment and therefore the amount of the gift.

In some situations, the total amount of a down payment can be a gift—like if the mortgage is a conventional or Federal Housing Administration (FHA) loan. But rules may vary for U.S. Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) loans. And in most cases, a lender will require a gift letter for an FHA, VA or USDA loan.

But keep in mind that a gift letter might not be needed if the gift money has been in the homebuyer’s bank account for 60 days or more. And a gift letter might not be required if the gift is less than 50% of the buyer’s monthly household income for a conventional, VA or jumbo loan.

Declare it’s a gift

A gift letter must spell out that the money is a gift and not a loan that must be repaid. And then the gift giver and recipient must sign the letter—which doesn’t have to be notarized.

Document the transfer of funds

A lender usually wants a homebuyer to show a paper trail documenting the flow of money from the gift giver to the recipient. This is to ensure the money is clean and not from any illegitimate or illegal sources. This also shows the lender that the gift giver actually had enough funds in their account to cover the gift.

It will depend on how the transfer is handled, but according to Bankrate, the paperwork for this might include:

• A copy of the gift giver’s check or withdrawal slip
• A copy of the homebuyer’s deposit slip
• A copy of the gift giver’s check to the closing agent
• A settlement statement verifying receipt of the gift
• A copy of a certified check
• A successful wire transfer receipt

Gift letter rules for mortgages depend on the type of loan someone is using.

Conventional loans

Generally, a down payment for a conventional loan can be as low as 3%–5%. 

Conventional loans owned by Fannie Mae or Freddie Mac are common among homebuyers. A conventional loan is a mortgage that is not guaranteed by the federal government. Federally guaranteed mortgages include FHA, VA and USDA loans.

When someone is buying a single-family home, the down payment for a typical Fannie Mae or Freddie Mac loan can generally come from a relative like a spouse, sibling, child or parent—or a non-relative, such as an employer, domestic partner, fiancé or fiancée. For a Freddie Mac loan, a wedding gift can also go toward a down payment.

FHA loans

FHA loans require a down payment of at least 3.5% of the home’s purchase price for a credit score of at least 580, or a down payment of 10% or more for a score of 500 to 579.

A gift for an FHA mortgage down payment can come from several sources, like:

• A relative
• A close friend who doesn’t have a conflict of interest
• An employer
• A labor union
• A charity
• A homebuyer assistance program

USDA loans

USDA doesn’t have many restrictions on who can give a down payment gift.

It’s worth noting that a down payment might not even be needed for a USDA loan, meaning a gift letter wouldn’t be required. But it’s best to ask your lender about this up front to find out if you’ll need a gift letter and what circumstances would call for one.

Ask your lender first if they have a template for a gift letter. Not only might they have one you can use, but they might require you to use their template.

If you’re using a generic template, make sure to ask your lender about any specific details your letter may need to include.

According to Fannie Mae, a gift letter must:

• Specify the dollar amount of the gift
• Indicate that repayment of the money is not expected
• Show the gift giver’s name, address and telephone number
• Identify the gift giver’s relationship to the gift recipient

For a homebuying gift made in 2022, no gift taxes are needed if the amount was $16,000 or less. For a gift made in 2023, no gift taxes are due if the amount is $17,000 or less.

Typically, the gift giver is responsible for paying taxes on gifts over that amount and must file a federal gift tax form with the IRS to do so.

A monetary gift can help a homebuyer make a down payment or pay closing costs for a home purchase. But a lender may require a gift letter to prove that it’s a gift and does not need to be repaid, in addition to other important details.

If you’re thinking about buying a home, it might help to first learn how much house you can afford before you begin your search. And if you’re a little further along in the process, it might help to remember these questions to ask when buying a house.