What is a Gift Letter for a Mortgage?

A little help can go a long way. But when it comes to mortgages, undisclosed help can go the wrong way. When a borrower is able to receive financial help in the form of a gift from someone in their lives, that can make a big difference.  

But if you are going to accept gift funds to help you with your down payment or other costs pertaining to the mortgage, there are rules you may need to follow. It’s not as simple as cashing a generous check.  

In this article, we will explain what a gift letter is, why lenders want gift letters for mortgages, and important gift letter requirements of which you should be aware.

What are Gift Letters for Down Payments?

Gift letters are typically required by lenders when a borrower receives gift funds from someone to help pay the down payment on a mortgage. The gift letter documents how much money is being given to the borrower by the donor. It also makes it clear that the donor is not expecting to be paid back for their gift.

Why Do Lenders Want Gift Letters?

Maybe you’re reading this, and you feel like providing a gift letter is a lot of extra work for nothing. You may be thinking, “If I have the money legally, why should it matter who gave it to me or how much they gave?” Well, there are important, practical reasons why lenders require that information in a gift letter.  

Primarily, lenders need to know that you can afford your mortgage. While your gift funds could be exactly what you need to cover your down payment, they may not be a sign that you will be able to pay for your mortgage over time.  

Further, lenders need to know whether that influx of cash was actually a gift and not a new loan. If you took out a personal loan, for example, that would impact your debt-to-income ratio. Mortgage lenders use your DTI to help assess your ability to pay back a mortgage. So, the gift letter ensures that the funds don’t need to be considered for your DTI.  

Finally, different loan types and lenders have unique rules regarding how much gift money a borrower can use and who can give them that money. Gift letters help your lender verify that you’re following those rules. Your lender may also investigate the gift funds beyond just the letter. In that case, they might contact the donor and ask for additional verification.

What to Include in a Gift Letter

Gift letters generally must include the following pieces of information about the person giving the gift, usually referred to as the donor: 

• Their full name (or the name of the agent or trust) 

• Address 

• Telephone number 

• Relationship to borrower 

• The dollar amount of the gift 

• A statement clarifying that the borrower does not have to repay the gift 

• The donor’s signature 

You may also need to include information like the name of the loan’s borrower, the borrower’s signature, and an identifier for the loan from the lender.

Mortgage Gift Letter Rules by Loan Type

Depending on what kind of loan you’re taking out, there will be different rules as far as who can give you gift funds. They may also differentiate how those funds can be spent and how much money can be given. When considering whether to use gift funds for your down payment, be sure to talk to your lender about their expectations based on your loan type.  

Conventional Loans

Conventional loans are any loan that is not insured by a United States government agency. They are issued by private lenders, and they can be conforming—meaning they meet loan limits used by Fannie Mae and Freddie Mac—or non-conforming—generally meaning they exceed the limits.  

Fannie Mae and Freddie Mac have slightly different requirements for gift letters.

Fannie Mae Acceptable Donors

Donors must be:  

• A relative of the borrower (spouse, child, other dependent, or any individual related to the borrower by blood, marriage, adoption, or legal guardianship) 

• A non-relative with a familial relationship to the borrower, such as a domestic partner (or relative of a domestic partner), a fiancé, a former relative, or a Godparent.  

• A trust established by an acceptable donor 

• The estate of an acceptable donor

Freddie Mac Acceptable Donors 

Donors must be: 

• A relative of the borrower (spouse, child, other dependent, or any individual related to the borrower by blood, marriage, adoption, or legal guardianship) 

• The borrower’s fiancé or domestic partner 

• An unrelated person who provided a wedding or graduation gift 

• A trust established by an acceptable donor  

• The estate of an acceptable donor

Veterans Affairs (VA) Loans

Gifts for VA loan borrowers can come from: 

• Gifts can come from a donor who is not affiliated with the builder, developer, real estate agent, or any other interest party to the transaction 

• Gift funds from a Real Estate Agent’s Commission can be used for closing costs and prepaids provided they are within the Interest Party Contributions (IPC) limits. In this case, though, they can’t be used for down payments or reserves.

Federal Housing Administration (FHA) Loans 

Gifts for FHA loan borrowers can come from: 

• The borrower’s family  

• The borrower’s employer or labor union 

• A close friend with a clearly defined, documented interest in the borrower, such as their fiancé 

• A charitable organization, governmental agency, or public entity that has a program providing homeownership assistance to low- or moderate-income families or first-time homebuyers.  

The FHA’s definition of a family member includes:  

• Siblings and stepsiblings 

• Child, foster child, adopted child, or stepchild 

• Parents, grandparents, stepparents, step grandparents 

• Uncle or aunt 

• Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

Final Thoughts 

Gift funds can be a positive difference-maker for borrowers in certain situations. If you are planning to use gift funds to help pay your down payment, be sure to speak with your lender about their requirements. It’s likely you’ll need to provide additional documentation about those funds, including a gift letter. Many lenders will give you a template for the gift letter, so if you aren’t sure where to start, ask for that!