Mortgage Down-Payment Gifts from Family + A Gift Letter Template
By Brandon Cornett | © 2013 All rights reserved
Question: "I'm buying a home soon, and it looks like I'll have to borrow some money from family members to cover the down payment. I have heard there are certain rules and restrictions about doing this. What do I need to do to use mortgage down-payment gifts from my family members? I want to make sure I do everything right, so there aren't any problems at the closing. Do I have to write a letter for my lender?"
Yes, you can use gifted funds from your relatives for the down payment on a house. You just need to get a letter documenting the gift, and then give it to your lender. The letter should be written by the family member who is giving you the money -- not by you. The down-payment gift letter does not need to anything fancy, but it does need to include certain items.
Make sure it includes the following items, at a minimum:
- The family member's name, address, phone number, and their relationship to you.
- The amount of money they are giving you (exact dollar amount).
- The date of the gift / donation.
- A statement verifying that they do not expect repayment.
Item #4 is the most important ingredient of the gift letter. The lender wants to make sure that the gifted funds are truly a gift, so they don't add to your overall debt. If the money was more of a loan from a family member (with a repayment requirement), it would affect your debt-to-income ratio. But if it's a gift that you don't have to repay, it doesn't add to your overall debt. That's the primary purpose of the letter.
Here's what the lender is afraid of. They qualify you for a mortgage loan based on your current debt and income picture. They do this to make sure you can afford your monthly payments, based on the amount of money you earn and the amount you pay toward your monthly debts.
If a family member loans you several thousand dollars for your down payment (and expects payback), it skews your debt-to-income ratio. It increases your total debt obligation. It could interfere with your ability to make your mortgage payments.
This is why they require a down-payment gift letter stating there is no expectation of repayment.
Sample Letter for Down Payment Gift
The gift letter itself is pretty straightforward. Ask your mortgage lender if they have a preferred format, or if they require any items beyond those listed above. Otherwise, you can just use a standard template for your letter. Here's an example of such a template:
June 5, 2011
To whom it may concern,
I am giving John Doe, my brother, a gift of $5,000 toward the purchase of his home. I do not expect or require any kind of repayment for this gift. Should you need to contact me regarding this contribution, you can do so using the information below:
1234 Elm Street
Anytown, VA 24018
Like I said, it doesn't have to be fancy. This short letter covers all of the key requirements listed above. It includes the donor's name, his contact information, and his relationship to the home buyer. It mentions the amount given ($5,000). It explains that there is no repayment requirement for the gift amount -- the critical item. It's simple and straightforward.
The lender will also verify that the gifted funds are in your account. They want to make sure you can access the money for mortgage down-payment purposes. A bank statement will generally suffice for this purpose. The lender may also ask for a deposit slip, or a copy of the canceled check (the check written by the family member for the down-payment gift to you).
The best-case scenario is to have the gifted funds in your own account prior to settlement / closing day. In you don't have the funds in time for settlement, your family member (the donor) might be able to give the escrow / closing agent a certified check for the gift amount, at the time of closing. But it's a lot easier to deposit the check into your own account before closing. If you have any questions about this, be sure to ask your lender.
I hope this answers your question about down-payment gift letters. If you have other questions about the home buying process, be sure to use the search tool on our main website. It gives you access to a research library with more than 800 articles.
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