Many prospective homeowners go to family and friends for financial assistance to piece together sufficient resources. According to the National Association of Realtors, 25 percent of first-time homeowners between the ages of 23 and 31, and 17 percent of first-time homebuyers between the ages of 32 and 41, got financial assistance from family or friends to aid with their down payment. Even though they are widespread, donations for the down payment must be correctly recorded in a document known as a gift letter.

What Is A Gift Letter For Mortgage Down Payment?

A gift letter is a document that helps meet the criteria that a borrower's down payment money originates from genuine sources. This criterion helps ensure that a borrower will be approved for a loan. The mortgage lender wants to be certain that the funds are not coming from an unlawful source and that they come from someone who is connected to the homebuyer in some way.

In the form of a gift letter, the donor attests not only to the fact that they bestowed the present but also to the fact that they were in a position to do so financially by supplying supporting documentation such as bank records. This is particularly significant for loans insured by the FHA.

Additionally, the donor ensures that the receiver will never be required to pay back the money that they have received. If the receiver were required to return the gift, the lending institution would have to compute the amount that would need to be repaid to determine whether or not the prospective buyer would still qualify for the loan. Included in a gift letter, at a bare minimum, should be the following:

• Who the donor is and where the gift came from are both important pieces of information.
• Assurance that the donor is in a position to donate money
• The connection between the provider and the receiver.
• The monetary value of the present.
• What exactly is the intention behind the gift?

Mortgage Gift Letter Rules by Loan Type

Fannie Mae and Freddie Mac conventional loans

When purchasing a single-family house, your down payment might consist of gifts from friends and family. The cash might come from a family, employer, close friend who has known you for a long time, an authorized down payment assistance (DPA) program, or a charitable organization. Freddie Mac also permits borrowers to use wedding presents, provided that a copy of the couple's marriage license is provided.

FHA loans

Mortgages that require a minimum down payment of 3.5 percent are eligible for backing by the FHA. It is possible to give the whole amount; however, the FHA needs a gift letter and accompanying documentation similar to those required for Fannie and Freddie's loans.

VA loans

The Department of VA of the United States government provides qualifying service members with mortgage loan guarantees. Although there is no need for a down payment with VA loans, applicants are permitted under VA rules to use gift money toward either a down payment or closing fees. The paperwork requirements are comparable to what is required for conventional and FHA loans.

USDA loans

Borrowers in rural areas of the United States with incomes ranging from low to moderate are eligible for mortgages guaranteed by the United States Department of Agriculture (USDA) that need no down payment. Gift money, like the money provided through the VA loan program, may be utilized to pay closing fees. You will be required to supply a gift letter and supporting documentation by the standards governing gift letters for other lending programs.

Mortgage Gift Letter Rules by Property Type

Primary residence

You can make use of gift money in the purchase of a principal house. It is possible to make the down payment without contributing your own money if you are purchasing a single-family home rather than a duplex or another property with several units.

Second home

The regulations lenders have in place regarding down payments for second houses are quite similar to those in place for the first property. The gift can cover the whole price if you contribute at least 20 percent of the total. If your total down payment is less than twenty percent of the home's purchase price, then at least five percent must come from your personal savings.

Investment property

No dice. It is inappropriate to utilize monies received as a gift for the first deposit on an investment property.