Rules For Mortgage Gift Letters
When you provide a gift letter, you need to follow rules based on the type of home loan you get and the type of property you buy. Such rules specify what’s considered a gift, which family members can gift you money and how much gift money you can use. Be sure to talk with your lender about the restrictions and rules that apply to your gift letter. Let’s briefly consider some potential rules.
By Loan Type
As mentioned, the rules for a mortgage gift and the associated gift letter differ by loan type. Keep in mind, though: Gift guidelines are subject to change. For this reason, you’ll want to speak with your lender to find out which rules apply to your situation.
Conventional Loan
The most common type of mortgage, a conventional loan is a mortgage loan that isn’t insured by an agency of the federal government but by a private lender. Family members are an acceptable source for gifting you money in connection with a conventional loan.
For conventional mortgage loans, acceptable sources are:
- Spouses, domestic partners, fiancés or fiancées
- Children or other dependents related to the recipient by blood, marriage, adoption or legal guardianship
- Any individual related to the recipient by blood, marriage, adoption or legal guardianship (including parents, grandparents, great-grandparents, aunts, uncles, cousins, nieces, nephews, in-laws and siblings)
- Any individual not related to the recipient by blood, marriage, adoption or legal guardianship but who has close, family-like ties (including godparents, a domestic partner’s relatives, and former relatives)
- A relative’s trust or estate
Family members can gift you the total down payment amount for a conforming loan, which is any conventional loan that isn’t a jumbo loan – a loan that exceeds the conforming loan limit put in place by the Federal Housing Finance Agency (FHFA). With a jumbo loan, however, some lenders may require that you make part of your down payment with your own money.
If the down payment is less than 20% on a second home or a 2- to 4-unit principal residence, at least 5% must be your own funds.
FHA Loan
Like conventional loans, FHA loans – insured by the Federal Housing Administration – allow many types of family members to gift you money. The difference is the FHA won’t accept down payment gift funds from cousins, nieces or nephews. However, gifts from close friends are acceptable, which can extend to cousins, nieces, nephews and ex-partners. The FHA also allows donations from employers, labor unions and charitable organizations.
Eligible donors can usually donate the entire down payment amount for an FHA loan. The down payment required depends on the borrower’s credit score. The minimum down payment is 3.5% with a credit score of at least 580. The FHA requires a down payment of 10% or more for a credit score of 500 – 579. Check with your lender to confirm these requirements if pursuing an FHA loan.
USDA And VA Loans
USDA loans and VA loans – government loans backed by the Department of Agriculture and the Department of Veterans Affairs, respectively – accommodate mortgage gifts quite well. Mostly anyone you have a relationship with can qualify as a donor. One notable exception to this is a real estate agent or anyone else who might have a vested interest in the sale of a property.
You can often make the full down payment with gifted funds, as long as the donor meets the specific loan program’s requirements.
By Property Type
The type of property you buy also affects the amount of gift money you can put toward your down payment.
Primary Residence
A primary residence is the home you live in for the majority of the year. This can be a single-family home, an apartment, condo, townhome or otherwise. You can use gift funds for the down payment on your primary residence.
However, the following guidelines apply:
- For a single-family unit, you can use gift funds to cover your entire down payment.
- For a multifamily unit, the entire down payment can come from gift money as long as the down payment is 20% or more.
- If your down payment on a multiunit home is less than 20%, at least 5% of the down payment funds must be your own money. The remainder can be gift money.
Secondary Residence
A secondary residence, also called a second home, is a residence you occupy for at least 14 days each year. This can be a vacation home, short-term rental property or any other home you visit every so often.
If you’re looking to use gift funds to make a down payment on a second home, consider the following guidelines:
- If your down payment is 20% or more, all funding can come from gifts.
- If your down payment is less than 20%, you must contribute 5% of your own funds.
Investment Property
You currently can’t use gift funds to make a down payment on investment properties.
