Over the past year or so we've seen mortgage rates drop to historic lows. Whereas even just a few years ago the rates were hovering above 6% (like when we bought our current home in 2006), within the past year or so we've seen rates on a 30 year fixed mortgage drop below 4%, sometimes into the low 3% range. Rates on 15 year fixed mortgages have been even lower, with rates going below 3% at times.
With mortgage rates so low, and with the economy and real estate market being a bit uncertain, a lot of people are jumping on the chance to take advantage of record low rates. They can't get much lower than they are now, but they can certainly go higher.
At our house we're no exception. We saw the rates for 30 year fixed rate mortgages were below 4%, and when my wife's parents offered to build us a new house on a beautiful wooded lot, we decided to strike while the rates were still near record lows. The only problem? We didn't have the full 20% down payment saved up yet, and we didn't want to borrow from retirement funds to get the money. Then my wife's parents offered to help us with the down payment with a one time gift.
When you're going through the mortgage underwriting process, all large deposits into your accounts may be scrutinized, and large checks from your parents or other family members are no exception. Your bank may ask you to get a gift letter from the person giving you the money, in order to approve your loan. So what is a gift letter?
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Gift Letter – What Is It, And Why Is It Needed?
A lot of homebuyers may not have enough money to cover a full down payment when buying a house, and as a result they may seek help from family to get some of the money needed to close.
The problem is that the banks want to make sure that the money you're receiving isn't adding to your debt obligations. If the money is a loan, it could affect your ability to repay the lender – and they don't like that.
A gift letter is required that basically tells the bank that yes, you did in fact receive a gift, and no it is not a loan. That assures them that you're not taking on additional debt burden that could affect their investment.
What To Include In Your Gift Letter
So what things should you be including in your gift letter?
- The giftor's name, relationship to the buyer, address and phone number.
- How much the gift is that they're transferring to you.
- The address of the property the gift will be used to purchase.
- A declaration that the gift is not a loan, and is not expected to be repaid.
The gift letter itself doesn't need to be very complicated or long. Just a statement of the facts. I used a template I found on another site as my example:
To Whom It May Concern:
We [donor's names] hereby certify that we have made [or will make, on a stated date] a gift of $[amount] to [names of recipients], our [child, sibling, grandchild, or other relationship between recipients and donors], to be applied toward the purchase of the property located at [address].
No repayment of this gift is expected or implied either in the form of cash or future services.
[Sign and date]
So just fill out your own gift letter with the facts mentioned above, have the donor sign and date it, and send it off to your mortgage company.
Making Sure You Have A Paper Trail: What To Include With Your Gift Letter
A lot of the time the mortgage company will ask for additional things to be included along with the gift letter. In our case they basically asked for a paper trail to prove that the money had resided in the account of the donor, and had then been transferred to our account. To do this we gave them the following:
- Originating account bank statement.
- Copy of the gift check.
- Copy of the deposit slip showing deposit amount for the exact amount of the check.
- Copy of bank statement showing funds in destination account.
Your bank may or may not need all of those things, but be prepared to give it to them if they ask. Be prepared to show where the money originated from (a bank account, sale of stock from a brokerage account, etc) and then show the trail with the money ending in the account used for closing.
From what I was told by our loan originator it sounds like the gift letter is used only for underwriting of your loan, and isn't reported to the IRS. Reporting of gifts is left to the individual taxpayer.
Have you ever had to write a gift letter? What did you include, and were you asked to provide any other information to prove the gift claim?