A gift letter is an important, formal, legal piece of documentation that can help explain that a (usually rather large) sum of money was gifted to you. Why would you ever need something like this? Simple.
When you’re applying for a loan, during a process known as underwriting, lenders will check your financial accounts to verify both assets as well as income. Before they approve any type of financing, they’ll want to ensure that you have the financial means to repay the money. If you’ve recently received money from a family member or close friend to use as a down payment on a new home, a gift letter may just be your saving grace in terms of getting approved for your mortgage loan.
Learn more about what a gift letter is, the different ways you can use one and how it relates to your Estate Plan here. We’re even offering you a free gift letter template!
What Is a Gift Letter?
A gift letter is a legal instrument that clearly and explicitly states, without question, that a friend or family member “gifted” - rather than loaned - you money. You can use a gift letter for mortgage lenders who may be questioning a large influx of cash that suddenly showed up in your checking or savings account.
Lenders may be leery of a sudden, unexplained increase in cash flow. In fact, it may even lead to questions about whether or not you’ll be able to pay back your mortgage loan. In their eyes, if you owe additional money on top of your mortgage (say, money you borrowed to secure a down payment), you may not be able to pay both lenders back. Traditional mortgage lenders can be skittish about this, because if your ability to make payments on both loans is in question, they don’t want to be the party who isn’t paid back!
Types of Gift Letters
Gift letters can be used in a few different ways, and understanding how and when they’d come into play can help you decide whether or not you may need one.
Gift Letter for Estate Planning - If you received a large monetary gift that you don’t anticipate ever having to pay back, a gift letter can be a nice back up to keep on file. It can be a part of your Estate Planning documents, and is something you’d want to keep in a safe place, easily accessible and ready to use. Even if you’re not sure now if you’ll need to use your gift letter, it’s still an excellent way to protect yourself. The last thing you’d want to have to deal with when purchasing a home or trying to secure any type of funding is having to prove that money was a gift. Having a gift letter for your Estate Planning purposes is an excellent way to fend off any unnecessary headaches in the future when it comes to securing funding.
Gift Letter for Mortgage - A mortgage gift letter can save you time and reduce the risk of your loan being denied. Buying a house can be stressful enough - if you need to scramble to prove that you were gifted money at some point in time, you might lose out on that perfect forever home.
Gift of Equity Letter - If you’re one of those lucky people who found the rare opportunity of a family member or close friend selling you a property at a price well below market value, count your blessing and be smart about your next moves. A gift of equity letter can detail the difference between the sale price you paid, and the actual fair market value. That difference is what’s known as a gift of equity, and a letter can state that you were the recipient.
FHA Gift Letter - Maybe you’re going after a specific type of loan like an FHA loan. Federal Housing Administration (FHA) loans are issued by an FHA-approved lender and are insured by the FHA. They were designed to accommodate the needs of lower-income to moderate-income borrowers and can accept some looser regulations for approvals. That said, if you’re gifted money to use as a down payment, an FHA lender will still likely want proof that the money was, in fact, a gift.
Money Gift Letter from Parents - Most parents agree they want to give more to their children than they ever had. If your parents are inclined to gift you money to enhance your financial future, a money gift letter is a smart thing to ask them to include with their generous monetary gift.
What Is Needed for a Gift Letter?
Yes, having a gift letter is ideal if you’ve received any large sum of money as a gift from family or friends. But unless it’s specific in terms of how it’s set up and what information is included, it might be useless. Make sure your gift letter includes the following:
The donor’s name
The donor’s address
The donor’s phone number
The donor’s relationship to you
The exact dollar amount of the gift
The date the gift was given
A complete and comprehensive statement from the donor, explicitly stating that no repayment is required or expected
The donor’s signature
The address of the property being purchased (if applicable)
Does a Gift Letter Have to Be Notarized?
No, a gift letter does not need to be notarized. However, both you and the donor do need to have signed it for it to be valid.
As long as the gift letter was written by the donor, and it explains the relationship you have with one another (along with everything listed above) and it’s signed by both people, it should be fine. That document alone will likely be able to serve as at least partial proof that you will not need to pay back any of the money you received.
Does a Gift Letter Have to Be From a Family Member?
No, a gift letter doesn’t have to be from a family member. It can also be from a close friend, as long as it’s clear that you have a very close and personal relationship with one another.
Keep in mind that while a gift letter alone is a great start, some lenders may request further information to ascertain the money is actually a gift. They may want to see the donor’s bank statements to ensure he or she actually had enough money to give you. And, they may even go as far as to ask for a bank slip that shows the money was transferred.
Gift Letter Template
A gift letter is not difficult to write. It’s typically a one-page document that’s written in plain English and lacks most, if not all, legal jargon. It can be very straightforward and simple, which makes it easy for you to create on your own. Trust & Will Gift Letter Template COMING SOON!
A gift that offers you the opportunity to purchase a home or other property can be one of the greatest things you ever receive. Make sure you don’t run into any snags by having a proper gift letter included in your Estate Plans, ready to use when and if the time comes.
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