In a Nutshell
If you’re receiving a gift of cash or equity from a generous person in your life to put toward a mortgage, you’ll need to provide a gift letter to the lender. There are specific items the letter needs to include — and there are differences between a letter for a cash gift and a letter for equity gifts.If you’re buying a house and are in a fortunate position to receive a gift to go toward your down payment, you’ll want to understand how a mortgage lender views that money.
The good news is that you’ll typically be able to use gifts for a down payment as long as the funds meet certain requirements. Those requirements include being accompanied by a formal gift letter for the mortgage to document the funds or equity.
The letter needs to indicate that the money is a gift and not actually a loan you must pay back. Plus, it must indicate that you can prove where the money is coming from.
Let’s dig into what a gift letter for a mortgage is and what the letter should include. We’ll also cover a few differences between cash gifts and gifts of equity and the potential tax implications of putting a gift toward the purchase of a new home.
- What a gift letter and why is it required?
- How do you write a mortgage gift letter?
- Do you pay taxes on mortgage gifts you receive?
- What is a gift of equity?
What is a gift letter and why is it required?
A gift letter for a mortgage is a written document that clearly indicates that you’re receiving a gift for a down payment of your home, or a gift of equity. It’s one of the documents you’ll need (where applicable) when applying for a mortgage.
A gift letter helps prove that the money or equity isn’t actually a loan in disguise.
Funds that come from gifts may be used to pay for all or part of a down payment on a home and — depending on the loan — the closing costs.
Depending on the loan, there are rules that may govern who can provide these gifts of cash or equity. According to guidelines from the U.S. Department of Housing and Urban Development, gift funds of cash for an FHA loan can come from a family member, your employer, a labor union, a charitable organization or a close friend.
For Fannie Mae–backed mortgages, gift funds can only come from certain relatives or domestic partners. For Freddie Mac–backed loans, gift funds can come from either a relative or unrelated person as long as they meet the eligibility requirements.
For a VA loan or USDA loan, a gift can come from anyone as long as they’re not affiliated with the real estate agent, developer, builder or any other party who might have a financial interest in the transaction.
If you’re a potential homeowner, a down payment assistance program might also be available from a governmental agency or public program that provides financial assistance to help with this major purchase.
How do you write a mortgage gift letter?
When writing a gift letter, you’ll need to have it signed and dated by you, the borrower, and the person or party offering the gift for your mortgage.
Plus, it needs to include the following information:
- The gifter’s name, physical address and telephone number
- The gifter’s relationship to the borrower
- The dollar amount of the gift
- The date the funds were transferred
- A statement that clearly expresses that no repayment is necessary nor required
Plus, your lender might require documentation showing the funds were indeed sent and received. Different programs may have different requirements.
Do you pay taxes on mortgage gifts you receive?
If someone gifts you down payment funds, they might owe a federal gift tax. The donor typically pays a gift tax, not the recipient.
But there’s a yearly amount that’s excluded from reporting a gift tax. In 2023, the IRS capped this exclusion at $17,000 per recipient.
Tax laws are always subject to change, so consider consulting a tax professional or the IRS official website to learn what the rules are for the current tax year.
What is a gift of equity?
A gift of equity is different than a cash gift. A gift of equity is what you get when someone sells you a house for less than its current appraised value as a gift.
For example, say a house is worth $350,000, but it’s sold to you for $300,000. In that case, the gift of equity is $50,000.
When you draft a gift letter in such cases, you may be required to provide the following details in order for the letter itself to be acceptable to the lender:
- Donor name and contact information
- Donor relationship to the buyer
- Cash value of the equity
- A “no repayment required” statement from the donor
- Donor signature
Your lender may require additional documentation. Before you draft the letter, ask what other information may be needed.