Let’s say you have a generous relative, or your parents are willing to give you money toward your down payment. How does this work? What are the regulations? Do I need a gift letter? These are questions we get asked all the time at React Mortgage.
what is a gift letter?
Most people think that if the have enough money for a house, why would a lender care where it came from? The reality is that lenders care because they need to ensure you you’re able to pay back the loan. If the lender sees a large influx of cash in your bank account, they will wonder if it might be a loan, and not a gift. Loans mean that you’ll have another payment on top of your already declared payments, which says you might get stretched thin paying all this back. That’s a red flag for lenders.
If the lender can verify that the money is indeed a gift (with no need to pay it back) then they can rest assured that you won’t have another payment to the person who gave you the money. If you can’t prove the money you received is a gift, the lender might deny the mortgage.
The solution is to use a gift letter. This is a statement that proves to the lender that the money you received was indeed a true gift. The person who gave you the money will need to sign, along with yourself, attesting to the fact that the funds were a gift and not a loan.
what is the maximum i can receive as a gift?
How much money does it have to be to qualify as a gift? Does it only have to be declared if it’s over $10,000? What if a relative gave me a $25 gift card, do I have to declare that?
The rule of thumb is that lenders will be looking for you to explain any amounts over half of your total monthly household income. So if you make $3000 per month, anything over $1500 will be looked at closely and they will want an explanation for those funds.
Now this rule of thumb applies to Conventional Loans, VA Loans, and Jumbo Loans. Now for a USDA Loan, the lender will be looking at any deposits that exceed 1% of the adjusted purchase price or the appraised value of the home. Normally whichever is larger.
proving the money is legitimate
The gift letter may not be the only thing the lender requires to prove the money coming in is legitimate. They may reach out to your donor and request deposit and withdrawal slips to tell them when they acquired the funds. Basically telling the lender that the money was in their account well before they gave it to you and they didn’t take out a loan to give you the gift.
Now we’re going to give you some tips to make sure your gift letter passes the scrutiny of the lender. We’ll even give you a template for the letter you’re free to copy and use for your self.
regulations for gift letters by loan type
Conventional Loans
Conventional Loans require that the money coming from a gift comes from members of your family. For this purpose, only the following people can give you gift funds:
- Your spouse
- Your parents (biological, adoptive, step- and foster parents all qualify)
- Your grandparents or great-grandparents
- Your aunts and uncles (including step-relatives)
- Your cousins (including step-relatives and adoptive relatives)
- Your nieces and nephews (including step-relatives)
- Your in-laws (including parents, grandparents, aunts, uncles, brothers-in-law and sisters-in-law)
- Your children (biological, adoptive, step- and foster children all qualify)
- Your siblings (including step-relatives, foster and adoptive siblings)
- Your domestic partner
- Your fiancé or fiancée
There’s one other person who qualifies and that’s a future in-law, but only if you get your loan from Fannie Mae.
FHA Loans
Unlike a Conventional Loan, FHA Loans allow close friends who can demonstrate a clear interest in your lift to give you gift funds. This allows people who would normally not be allowed to give you funds the option to gift you money. Even people like ex-spouses and cousins. Additionally, the following places/people can give you gift funds:
- Your employer
- Your labor union
- A charitable organization that provides financial assistance
- A government agency or public entity that provides home-buying help to first-time home buyers
Also, similar to Conventional Loans, all the same family members listed above can gift you money, except for cousins–but if you are close friends with your cousin, then it may be possible as friends are allowed to give you gift funds.
USDA and VA Loans
These types of loans don’t have nearly the amount of restrictions as the previous two types. Nearly anyone can give you funds when you buy a home with a USDA or VA Loan. The only parties that cannot are ones that have a vested interest in the sale, like:
- The person selling the home you’re buying
- The person or company who built the home you’re buying
- The developer of the home you’re buying
- Your real estate agent or the seller’s agent
regulations for gift letters by property type
Depending on the property type, you may be required to contribute a certain percentage of the funds. Remember, there’s no limits to how much money you can receive, but how much you have to put in depends on the property in question.
Primary Residences
This one actually allows you to use all gift funds to purchase the home if it’s a single-family unit. You can contribute any amount you choose, down to zero dollars. But if you’re purchasing a multi-family unit, you must contribute 5% of the down payment if you’re paying less than 20% down payment on the property in total. If you’re paying over that it’s treated like a single-family unit and you don’t have to contribute anything.
Secondary Residences
Basically this mirrors the multi-family unit rules. You only have to contribute 5% if you’re putting less than 20% down on the home. If you’re paying over 20% for a down payment, you can use 100% gift funds.
Investment Property
No gift funds can be used for the down payment of an investment property.
timing is everything
When money has been in your account for over 60 days, it’s normally considered secure by lenders. So by that rule, you’ll want to make sure your large gift amount has been in your account for at least 2 months before you apply for a loan to help make the underwriting process easier.
Lenders will be less suspicious of funds that have been in your account for two months, so make sure you time your mortgage application appropriately.
gift letter template
You might be provided with a gift letter template from your lender, but if they don’t here is our sample template you can use:
Date:
To: [name and address of bank or lender]
I/We [name of gift-giver(s)] intend to make a GIFT of $ [dollar amount of gift] to [name(s) of recipient(s)] , my/our [relationship, such as son or daughter], to be applied toward the purchase of property located at: [address of the house you’re buying, if known] .
There is no repayment expected or implied in this gift, either in the form of cash or by future services, and no lien will be filed by me/us against the property.
The SOURCE of this GIFT is: [describe the investment, bank, or other account the gift is coming from] .
Signature of Donor(s): _____________________________
Print or Type Name of Donor(s):
Address of Donor(s): Street, City, State, Zip:
Telephone Number(s) of Donor(s):
Email Address of Donor(s):
in conclusion
Gift funds can be a great thing when they come from the appropriate party and are timed correctly. There’s no limit to the amount of money you can receive as a gift for a down payment, but you may need to contribute some of your own money depending on the property type. Keep in mind you’ll likely need a gift letter from your donor to ensure your lender accepts the gift funds.
If you have any questions regarding gift funds, feel free to give us a call and one of our knowledgeable mortgage experts will be happy to answer your question or give you a rate quote.
