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A gift letter is a piece of legal, written correspondence explicitly stating that money received from a friend or relative is a gift. The most common use of gift letters is when a borrower has received assistance in making a down payment on a new home or other real estate property. Such letters state that the money received is not expected to be paid back in any way, shape, or form. If you have received a gift from friends or family to buy property, your mortgage provider may require you to sign a gift letter.
In this guide, we’ll look at what a gift letter is, how and why you can use one, and what the tax implications of gifts are.
A gift letter is a formal document proving that money you have received is a gift, not a loan, and that the donor has no expectations for you to pay the money back.
A gift can be broadly defined to include a sale, exchange, or other transfer of property from one person (the donor) to another (the recipient). Common forms of gifts include:
While gift letters are most common with mortgage down payments, they can be provided for estate planning purposes or with a gift of equity. An equity gift letter accompanies a home sale below market value. This usually occurs when someone gifts real estate property to a relative.
Though gift letters can cover any kind of gift, made for any purpose, they are most commonly used during the process of applying for a mortgage to buy property. If you are buying property, and if you have received a monetary gift that you plan to use toward a mortgage down payment or closing costs, then you must provide a gift letter to prove that the money is not a loan.
During the underwriting process for a mortgage loan, lenders may check a loan applicant’s financial status and verify that they have the means to repay the loan. In addition, this additional debt may be considered when factoring in the pricing and terms of the mortgage agreement.
For example, suppose you just got married and your grandparents gave you $5,000 as a wedding gift. You can use this money toward a down payment and closing costs on a home, but to do so, you’ll have to reassure your mortgage provider that it wasn’t a loan.
To do that, you have your grandparents draw up a gift letter that you can then give to a mortgage lender. The gift letter will indicate their relationship to you, the exact amount and source of the funds, and state that you’re under no obligation to pay it back.
If you plan on using wedding gift money to put a down payment on a home, make sure it comes from an eligible donor. Gift letter requirements and acceptable donors vary by mortgage loan type.
Gift letters follow a fairly standard format, but some mortgage lenders (or other financial institutions) prefer you to use a template. In general, the person giving the gift must write and sign the gift letter. Ideally, they should provide the gift letter at the time of the gift, but this doesn’t always happen and the letter may be written and signed at a later date.
A gift letter should include the following information:
Bear in mind that your mortgage lender may well look into the circumstances of the gift and may ask you for more information or evidence about it. This could include bank statements, check copies, and proof of wire transfer. This research is done to validate your financial situation, assess risk, and ensure that you can repay the loan to which you are applying the gifted money to. It’s possible to use multiple gifts toward your down payment, but you’ll need a separate gift letter for each one.
Check with your mortgage provider about what evidence you should provide with a gift letter—otherwise, your application may be delayed.
Not all gifts are taxable. Gifts that fall into the following categories are not taxable:
If a gift is taxable, the donor is usually the one who pays the gift tax unless the gift recipient makes an arrangement to pay it.
As of 2022, the Internal Revenue Service (IRS) determined that the annual exclusion on a gift per person per year is $16,000. In 2023, this gift tax exemption is increasing to $17,000. This means that the donor will have to pay taxes and file a gift tax return on any amount above that. For example, if someone gives you $25,000, they will have to pay taxes on the amount over the annual exclusion. For 2023, this would be $8,000.
Lastly, be aware that even if gift amounts fall within the IRS gift exclusions and exemptions, donors will still need to file a tax return so that their donations can be counted toward their lifetime tax exemption.
You don’t pay taxes on some types of gifts. These include gifts that are not more than the annual exclusion for the calendar year, tuition or medical expenses, gifts to your spouse, or gifts to a political organization.
Yes. Because the paperwork for your loan is entered into the record, a gift letter is then a legally binding document.
Because a gift letter is legally binding, lenders will require the letter to be signed by the donor. It is less important for the recipient to sign the letter, as the letter is primarily focused on confirming the donor expects to not receive their money back.
Most mortgage providers will have a template that you can follow, but in general, your gift letter should include:
A gift letter is a formal document proving that money you have received is a gift, not a loan, and that the donor has no expectations for you to pay the money back. Though gift letters can cover any kind of gift, made for any purpose, they are most commonly used during the process of applying for a mortgage to buy property.