Refinance & Mortgage Tips: Down Payment With Gift Letter

Why Down Payments are Crucial

For many first-time buyers, particularly newlyweds or young individuals with limited credit history and financial stability, qualifying for 100% financing is unlikely. These buyers may also struggle to accumulate enough savings to cover the down payment. Family members often become a crucial source of financial assistance in these scenarios. However, lenders typically require that any down payment funds come from immediate family members, such as parents, siblings, grandparents, or other close relatives. Funds from non-family sources, like friends or colleagues, are generally not accepted unless a close and long-standing relationship can be documented. This policy aims to prevent borrowers from taking on additional personal debt to cover their down payment, which could negatively impact their debt-to-income ratio (DTI).

Understanding Gift Letters

If you need to rely on family assistance for your down payment, you will need to provide evidence that these funds are indeed a gift, not a loan. This documentation is crucial to assure the lender that the funds do not need to be repaid. To facilitate this process, you and your family will be required to complete a “Gift Letter.”

A Gift Letter serves to confirm the nature of the funds and includes several key details:

• Donor’s Name: The individual providing the funds.

• Recipient’s Name: The homebuyer receiving the funds.

• Relationship: The relationship between the donor and the recipient.

• Amount of the Gift: The exact amount being gifted.

• Property Address: The address of the property the funds will be used for.

• Statement of Non-Repayment: A clear statement that the funds are a gift with no expectation of repayment.

• Disclosure of Parties: Assurance that the donor is not involved in the transaction, such as not being the broker, seller, agent, loan officer, or builder.

Additionally, the donor may need to provide documentation showing the source of the gifted funds, such as bank or brokerage account statements. If the funds are deposited directly into escrow or into your bank account, it is important to keep copies of checks, deposit slips, or receipts to document the transfer.

In summary, while securing a down payment through family assistance is a common practice, it requires thorough documentation to comply with lender requirements. The Gift Letter is a vital component of this process, ensuring transparency and verifying that the funds are provided as a gift.