A mortgage gift letter is a document that is provided by a donor to a borrower when a financial gift is given to purchase a home. The letter serves as proof that the funds being used for the down payment or closing costs are a genuine gift and not a loan that will need to be repaid. This letter is typically required by mortgage lenders to ensure that the borrower’s financial situation is accurately represented and that the gift funds are legitimate.
When a borrower receives a financial gift from a family member or friend to help with the purchase of a home, the mortgage gift letter is an important part of the loan application process. It provides documentation that the funds are not a loan and do not need to be repaid, which is important for lenders to determine the borrower’s ability to repay the mortgage.
Why do you need a Mortgage Gift Letter?
If you are receiving a financial gift to assist with your home purchase, a mortgage gift letter is essential. Lenders require this letter to ensure that the funds are a genuine gift and not a loan that could impact your ability to repay the mortgage. Without a mortgage gift letter, the lender may consider the funds as debt and include it in your debt-to-income ratio, potentially affecting your loan approval.
Additionally, a mortgage gift letter provides transparency and helps prevent fraud. It ensures that the source of the funds is legitimate and that there are no undisclosed agreements or arrangements between the borrower and donor.
What to include in a Mortgage Gift Letter?
When writing a mortgage gift letter, it is important to include specific information to satisfy the requirements of the lender. Here are the key elements to include:
- Donor’s Information: Include the donor’s full name, address, and contact information.
- Borrower’s Information: Provide the borrower’s full name, address, and contact information.
- Relationship: Explain the relationship between the donor and the borrower (e.g., parent, grandparent, friend).
- Gift Amount: Clearly state the exact amount of the gift.
- Source of Funds: Describe the source of the funds, such as savings, investments, or sale of property.
- Gift Purpose: Specify that the gift is intended for the purchase of a home or to assist with closing costs.
- No Repayment Agreement: Emphasize that the gift is not a loan and does not need to be repaid.
- Signatures: Both the donor and the borrower should sign and date the letter.
How to write a Mortgage Gift Letter?
Writing a mortgage gift letter may seem daunting, but it is relatively straightforward. Here are the steps to follow:
- Use a formal tone and format the letter as a business letter.
- Include the date and address of the letter to the lender.
- Begin the letter by stating that it is a gift letter for a mortgage loan application.
- Provide the donor’s information, including their full name, address, and contact information.
- Include the borrower’s information, including their full name, address, and contact information.
- Explain the relationship between the donor and the borrower.
- State the exact amount of the gift and the source of the funds.
- Clearly state that the gift is not a loan and does not need to be repaid.
- Specify that the gift is intended for the purchase of a home or to assist with closing costs.
- Both the donor and the borrower should sign and date the letter.
Mistakes to avoid
When writing a mortgage gift letter, there are a few common mistakes that you should avoid:
- Incomplete Information: Ensure that all the necessary information, including the donor’s and borrower’s details, gift amount, and purpose, are included in the letter.
- Unclear Language: Use clear and concise language to avoid any confusion or misinterpretation of the letter’s contents.
- Missing Signatures: Both the donor and the borrower must sign and date the letter to make it valid.
- Incorrect Format: Format the letter as a formal business letter and address it to the lender to maintain a professional tone.
- Non-Compliance with Lender Requirements: Familiarize yourself with the specific requirements of your lender and ensure that your gift letter meets their criteria.
By following these guidelines and avoiding common mistakes, you can create a strong and effective mortgage gift letter that satisfies the requirements of your lender. Remember to keep the tone formal and provide all necessary details to ensure a smooth loan application process.