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.
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.