writing a gift letter
Finance, Kitchen Sink

Gift Letters In Real Estate: Everything You Need To Know

What’s a gift letter? The popular term in finance also plays a role in the real estate market. With millennials facing student debt crises, it’s important to note what a gift letter is and how it can help you secure your next home.

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As the student loan debt crisis continues and many millennials enter the home-buying field, they are discovering that buying a house comes with a lot of upfront costs. From home inspections to appraisals, buying a house can certainly be a drain on someone’s bank account. For many, the hurdle of acquiring enough money to cover a down payment and closing costs is simply not possible without help. It’s not uncommon for loved ones and relatives to offer to help ease the financial burden. In fact, on average, parents are giving $39,000 to help their children buy a home and while it’s acceptable in most cases for parents or loved ones to provide cash to cover some or all of a down payment or closing costs, they do require the use of a gift letter.

writing a gift letter

Gift Letters In Real Estate: Everything You Need To Know

What Is A Gift Letter

Much like its name, a gift letter states the funds provided are a gift, and there are no expectations of the money being repaid. It’s important to understand that lenders require this letter because they have to account for all money contributing to the purchase. Some title companies or lenders may have a form letter for both parties to complete; however, it should state the parties involved, amount gifted, and clearly express that the funds are gifted.

What A Gift Letter Is Not

A gift letter is not a promissory note or a payment plan. The receiver of the gift funds is under no obligation to repay the gift funds which is what the letter must clearly state. This is a critical fact because even if the parties agree verbally that the funds are not gifted, the gift letter can, and usually, supersedes that agreement- meaning the buyer can forego repaying the funds.

Why The Gift Letter Is Needed

If the donor didn’t state the funds were gifted, they could make the claim that they are also a lender on the mortgage and enact a lien on the property. By stating the funds are gifted, the donor terminates the right to place a lien on the property. In addition, the gift letter provides documentation to avoid the donor paying all or some of a hefty gift tax. Consult a tax attorney or CPA prior to gifting funds.

The Fine Print On Gift Letters

Before your parents, grandparents, in-laws or other loved ones write the check, it’s important to consult your loan officer to see if a gift letter will be required for the transaction. It’s critical the loan officer is aware of the gift funds sooner rather than later, as to not delay the closing.

Other things to be aware with gift funds:

  • The donor can’t be the builder, real estate agent, developer or an interested party in the transaction.
  • They are not allowed to be used on investment properties
  • Depending on the loan amount, there may be a minimum borrow contribution required.
  • The funds must be guaranteed & authenticated by the lender.
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Jennifer is an accidental house flipper turned Realtor and real estate investor. She is the voice behind the blog, Bachelorette Pad Flip. Over five years, Jennifer paid off $70,000 in student loan debt through real estate investing. She's passionate about the power of real estate. She's also passionate about southern cooking, good architecture, and thrift store treasure hunting. She calls Northwest Arkansas home with her cat Smokey, but she has a deep love affair with South Florida.

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