What Is a Gift Letter?

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A gift letter is a formal and legally binding document that states a large sum of money was gifted to you by a donor. It officially declares that the money is a gift and not a loan that needs to be paid back.

Definition and Example of a Gift Letter

A gift letter is a formal document proving that money you are using for a down payment on a mortgage loan was given to you as a gift. The gift letter, written by the donor, states that there is no expectation of repayment.

If you received a monetary gift that you plan to use toward a mortgage down payment or closing costs, you must provide a gift letter to prove that the money is not a loan.

During the underwriting process for a mortgage loan, lenders check a loan applicant’s financial status and verify they have the means to repay the loan. 

A gift letter legitimizes the source of funds and ensures any large deposits into your account are genuine gifts and not an additional loan you will need to repay.

It’s common for newlyweds to receive money as a wedding gift. For example, suppose you just got married, and your grandparents gave you $15,000 as a wedding gift. You can use this money toward a down payment and closing costs on a home. To do so, you must have your grandparents draw up a gift letter that you can provide to a mortgage lender. The gift letter will indicate their relationship to you, the exact amount and source of the funds, and state that you’re under no obligation to pay it back.

How Does a Gift Letter Work?

The gift-giver must write and sign the gift letter. It’s easier for the recipient to keep a gift letter on file if the donor provides it at the time of the gift. However, this doesn’t always happen.

Should you need to create a gift letter, mortgage lenders will have a template available or you can find one online. Generally, a gift letter should include the following information:

  • The exact dollar amount of the gift
  • The donor’s name, address, and phone number
  • The donor’s relationship to the loan applicant
  • The date the funds were or will be transferred
  • A statement that no repayment is expected 
  • The address of the property being purchased (if known at the time)
  • The recipient and donor’s signatures

Double-check with the lender about what information it requires to be included. Most lenders will want to review all the details surrounding the gift and may request more documentation such as bank statements, check copies, and proof of wire transfer. This research is done to validate your financial situation, assess risk, and ensure you can repay the loan you are applying the gifted money to.

If you plan on using wedding gift money to put a down payment on a home, make sure it comes from an eligible donor. Gift letter requirements and acceptable donors vary by mortgage loan type.

Loan applicants can receive and use monetary gifts from multiple sources. However, they will need a gift letter for each donation. Gifts may come in the form of cash or equity, in most cases.

While gift letters are most common with mortgage down payments, they can be provided for estate planning purposes or with a gift of equity. An equity gift letter accompanies a home sale below market value. This usually occurs when someone gifts real estate property to a relative.

Types of Gifting

The general gifting guidelines for the most common mortgage loans are as follows. Each loan program has its own rules for the amount of gift funds you can apply.

Conventional Loans

Only gifts from a family member are acceptable for conventional loans through Freddie Mac or Fannie Mae. This includes people related to the recipient by blood, marriage, or adoption, such as a spouse, domestic partner, fiance, child, dependent, grandparent, aunt, uncle, niece, nephew, cousin, or guardian. The donor cannot be an interested party in the real estate transaction.

FHA Loans

For a single-family Federal Housing Authority (FHA) loan, gifts from all family members (by blood, marriage, foster, or adoption) are accepted except cousins, nieces, and nephews. Gifts are also accepted from employers, labor unions, close friends, charitable organizations, governmental agencies, or public entities for low- and moderate-income families or first-time homebuyers.

VA and USDA Loans

The only gift requirement for Department of Veterans Affairs (VA) loans and Department of Agriculture (USDA) loans is that the donor cannot be an interested party in the transaction for these kinds of loans. For example, the donor cannot be a seller, builder, developer, or real estate agent for the home being purchased.

How Much Are Gift Letter Taxes?

Not all gifts are taxable. If they are, the donor is usually the one who pays the gift tax unless the gift recipient makes an arrangement to pay it.

As of 2021, the IRS says that the annual exclusion on a gift per person per year is $15,000. This means the donor will have to pay taxes and file a gift tax return on any amount above that. For example, if someone gives you $25,000, they will have to pay taxes on the amount over the annual exclusion, which is $10,000 in this case.

Married couples may take advantage of a “gift splitting” tax rule and give up to $30,000 combined without incurring tax penalties.

The lifetime gift tax exemption for 2021 is $11.7 million. This means someone can give up to $11.7 million throughout their lifetime without being taxed on it. That number increases to $23.4 million for married couples: $11.7 million for each spouse.

Even if gift amounts fall within the IRS gift exclusions and exemptions, donors will still need to file a tax return so their donations can be counted toward their lifetime tax exemption.

Key Takeaways

  • A gift letter is a formal legal document that declares that a loan applicant received funds as a gift and not a loan.
  • All gift letters explicitly state that the gift does not need to be repaid.
  • Loan applicants need to submit a gift letter when using a monetary gift on a mortgage down payment.
  • Acceptable gift donors vary by mortgage loan type and lender.
  • An individual donor can give up to $15,000 per person per year without being taxed.

Article Sources

  1. Rocket HQ. "Understanding Gift Letters and Your Mortgage." Accessed Sept. 30, 2021.

  2. Cherry Creek Mortgage. "Mortgage Down Payment Gift Rules: What You Should Know." Accessed Sept. 30, 2021.

  3. Chase. "How To Use Gift Money for a Down Payment." Accessed Sept. 30, 2021.

  4. Freddie Mac. "Asset Eligibility and Documentation Requirements," See "(c) Special Requirements for Other Eligible Sources of Funds." Accessed Sept. 30, 2021.

  5. Fannie Mae. "B3-4.3-04, Personal Gifts," See "Acceptable Donors." Accessed Sept. 30, 2021.

  6. Federal Housing Authority. "FHA Single Family Housing Policy Handbook," Page 12. Accessed Sept. 30, 2021. 

  7. U.S. Department of Housing and Urban Development. "Section B. Acceptable Sources of Borrower Funds," Page 30. Accessed Sept. 29, 2021.

  8. U.S. Department of Veterans Affairs. "Chapter 4 Credit Underwriting," See Page 4-37. Accessed Sept. 30, 2021.

  9. U.S. Department of Agriculture. "HB‐1‐3555:Chapter 9 Revision Overview: SFH Guaranteed Loan Program," Page 17. Accessed Sept. 30, 2021.

  10. IRS. "Frequently Asked Questions on Gift Taxes," See "How Many Annual Exclusions Are Available?" Accessed Sept. 30, 2021.

  11. IRS. "Frequently Asked Questions on Gift Taxes," See "What If My Spouse and I Want To Give Away Property That We Own Together?" Accessed Sept. 30, 2021.

  12. IRS. "Estate Tax." Accessed Sept. 30, 2021.

  13. Charles Schwab. "The Estate Tax and Lifetime Gifting." Accessed Sept. 30, 2021.

  14. IRS. "Instructions for Form 709 (2020)." Accessed Sept. 30, 2021.