You’ll need to understand the mindset of a mortgage lender if you are buying a home and you have the opportunity to receive a gift that will go towards your down payment.

Good news is that gifts can be used to make a downpayment if the funds meet certain requirements. These requirements include a formal gift letter to the mortgage to document equity or funds.

It must be clear that the money received is a gift, and not a loan that you have to repay. It must also indicate that you have proof of where the money came from.

Let’s look at what a gift card for a mortgage should look like and what it should contain. We will also discuss the differences between cash gifts, gifts of equity, and the tax implications of gifting towards the purchase of a home.

What’s a gift card and why do you need one?

A gift letter for mortgage is a document that clearly states that you are receiving a gift for down payment or equity. This is one of the documents that you will need to apply for a mortgage.

A gift letter can be used to prove that the money is not a loan.

Gifts may provide funds that can be used to cover a portion of the down payment and, depending on the loan, the closing costs.

There may be rules regarding who can give cash or equity depending on the loan. The U.S. Department of Housing and Urban Development has guidelines that allow cash gifts to an FHA loan from family members, friends, employers, labor unions, charitable organizations, and other close individuals.

Gift funds cannot be given to Fannie Mae-backed homeowners. Gift funds for Freddie Mac loans can be from any relative, as long as they meet the eligibility criteria.

A gift is allowed for a VA loan and USDA loan if it’s not from a real estate agent, developer or builder.

A down payment assistance program may be available to potential homeowners from a government agency or public program that offers financial assistance for major purchases.

How to write a gift letter for a mortgage?

You, the borrower and the person/party offering the gift must sign and date the gift letter.

It must also include the following information:

  • Name, address, and phone number of the gifter
  • Relationship of the gifter to the borrower
  • The gift amount in dollars
  • Date the funds were transferred
  • A statement that clearly states that repayment is not required or necessary

Your lender may also require documentation to prove that the funds were sent and received. Different programs might have different requirements.

Are you responsible for paying taxes on any mortgage gifts that you receive?

A federal gift tax may be due if someone gives you money to pay down your down payment. Gift taxes are usually paid by the donor, and not the recipient.

However, there is a maximum annual amount that can be exempted from reporting a gift-tax. This exclusion was capped at $16,000 per recipient by the IRS in 2022.

Tax laws can change at any time. Consult a tax professional to find out the latest tax rules.

What’s a gift equity?

A gift of equity differs from a cash gift. When someone gives you a house at a lower value than the current appraised value, it is called a gift of equity.

Let’s say that a house is $350,000 in value, but you sell it for $300,000. In this case, the gift to equity is $50,000.

To be acceptable to the lender, you might be asked to include the following information when you write a gift note in these cases:

  • Contact information and name of donor
  • Relationship between the buyer and the donor
  • Cash value of equity
  • The donor will sign a “no repayment required” statement
  • Signature of the donor

Your lender may require additional documentation. Ask your lender for additional information before you begin to draft the letter.