Mortgage gift letters - what are they and when are they necessary?

Let's start with the basics of using a gift for purchasing a home. 

Many people are unaware of the fact that they can use gift funds for the down payment and/or closing costs when they buy a new home.

Conforming, FHA & VA mortgages all have rules regarding this and permit different amounts, but the idea behind each is pretty similar. Typically, the home being purchased must be a primary or second home and the person giving the gift must be a relative or family member.

What is a gift letter and when is it required?

The gift can occur at or before closing. I advise my borrowers to have the gift transferred from the donor to the recipient as soon as possible to avoid any last minute issues with assets as the closing approaches. In both instances, the parties must complete a gift letter. The gift letter is a simple statement regarding the amount of gift funds and the terms of repayment, if any. A true gift will not have any repayment terms, but it is still important to note the absence of repayment or lien in the letter. It is also important to state the relationship between parties in the letter, since most loans require the donor to be a family member. The letter must be signed and dated by both parties.

Along with the gift letter, the borrower and donor will be required to provide evidence of the funds being used as a gift. If the transfer has already occurred, three items will required. The first is a deposit slip from the borrower showing the funds transfer. The second would be a bank statement with all pages from the account the donor transferred the money from. And lastly, a transaction log or statement from the borrower's account showing the money in the account, ready to be used.

Is a gift letter always required?

One way to avoid documenting the gift is to transfer the money from donor to recipient over two months before applying for a home loan. Since lenders only require two months of bank statements in most transactions, the money would be considered "seasoned" (read my post on this for more info) and no further documentation would be required.

Each loan type has a little different guidelines regarding gift funds, so it is best to consult a mortgage professional if you are considering using these funds for a home purchase. Of course, if you are in Arizona, I would be more than happy to consult you on this or any other mortgage question.

Thanks for reading my blog!

Website: Arizona Mortgage Pro

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