Congratulations on your decision to purchase your first home! This is a major milestone that calls for plenty of celebration, from housewarming parties to sharing your new home photos on social media.
Before you can fully enjoy your new home, however, you’ll need to take care of some financial details, such as your down payment. If you’re short on funds, you can ask friends and family to contribute by gifting you money. This can be a great way to cover your down payment and closing costs without having to dip into your own savings.
When using gifted money for your mortgage, it’s important to provide your lender with a mortgage gift letter. This letter, written by the donor, certifies that the gift is not a loan and must be provided as part of the mortgage application process.
To learn more about mortgage gift letters and how they can help you buy your first home, read on.
What Is a Mortgage Gift Letter?
A mortgage gift letter is a document that is required by lenders when a borrower is using gifted money from friends or family to help cover the costs of purchasing a home. The letter is signed by the donor of the gift funds and confirms that the gift is being given with no expectation of repayment.
This is important to lenders because they want to ensure that the borrower is not taking on additional debt in the form of a loan from friends or family, as this could potentially affect their ability to repay the mortgage. The mortgage gift letter serves as a way for the lender to verify that the gifted funds are not a loan and do not represent an additional financial obligation for the borrower.
How Do You Write a Gift Letter for a Mortgage?
A mortgage gift letter is a document that is used to confirm the source and nature of gifted funds that are being used to help cover the costs of purchasing a home. It must include information about the donor, such as their name and contact information, as well as details about the gift, including the amount, the date it was given, and the donor’s relationship to the borrower.
The letter must also include a statement that the donor does not expect repayment of the gift and provide information about the donor’s bank account, including the account number and type of account. The letter must be signed by the donor and may be required by the lender as part of the mortgage application process. The purpose of the mortgage gift letter is to provide assurance to the lender that the gifted funds are not a loan and do not represent an additional financial obligation for the borrower.
Mortgage Gifts by Loan Type
When you’re buying a home, you may be able to receive financial assistance from friends or family in the form of a mortgage gift. This is a sum of money that is given to you to help cover costs like your down payment and closing costs, and it does not come with any expectation of repayment. In order to use a mortgage gift, you’ll need to provide a mortgage gift letter to your lender.
This letter must be signed by the donor and include information about the gift, such as the donor’s name and contact information, the amount of the gift, and a statement that repayment is not expected. Different types of mortgage loans have different requirements when it comes to mortgage gifts. For example, conventional loans typically only allow gift funds to be donated by family members, while FHA loans allow gifts from a wider range of people, including friends and employer or labor union.
USDA and VA loans have the most flexibility when it comes to mortgage gifts, as there are no restrictions based on the relationship between the donor and the buyer. However, donors who have an interest in the sale of the property, such as the seller or real estate agent, are not allowed to donate to these loans.
Mortgage Gift Requirements by Property Type
If you’re buying your first home, you may not need to personally contribute to your down payment if you have gift money, down payment assistance, or a low down payment mortgage. However, the type of property you’re purchasing may have specific requirements for your contributions.
For example, if you’re buying a single-family home, you don’t have to contribute any of your own money towards the down payment. The entire amount can be paid through gift funds. On the other hand, if you’re purchasing a multi-family home or a second home with less than 20% down, you’ll need to contribute 5% of the down payment with your own money. Investment properties have the strictest requirements, and gift money cannot be used towards the down payment at all.
Overall, it’s important to keep in mind that the requirements for down payment contributions may vary depending on the type of property you’re buying. However, as a first-time home buyer, you may have several options for paying for your down payment without having to save up thousands of dollars on your own.