There is a bit of confusion sometimes over what exactly a gift letter is in the world of real estate and financing. Well, sometimes a prospective home buyer can’t come up with sufficient funding in order to qualify for a mortgage loan on the investment property they wish to purchase. And while there are sometimes options like “no money down” or “low money down” types of arrangements available, the other option is finding the rest of the cash you need from a family member.
Now, while many lenders tend (in general) to frown upon borrowing money from a 3rd party, they recognize a difference when the funds are “gifted” – in other words, the “gifter” doesn’t desire or expect a re-payment of the money from the person receiving it. And this is exactly where a gift letter comes into play. While it may sound like a casual or colloquial term, a gift letter is in fact an officially recognized document in the legal and financial world.
Haile Title Company of Florida defines it below:
A letter to HUD from the donor (giver) stating that a gift of money has been made to the buyer in order to purchase specific property. The relationship of the donor and donee is stated, as well as the amount of the gift.
Military.com explains the definition another way:
If your relatives can contribute additional funds in the event you don’t have enough money to close a sale, they will need to send this to the lender, stating that the donor does not expect to be repaid. Donated funds must be verified before the home sale is closed.
According to FiveCentNickel.com the gift letter is used by mortgage brokers solely for the purpose of underwriting loans, and is not forwarded to the IRS in any fashion. They continue with the following conclusion:
Assuming this to be true, it’s conceivable that you could work around the loan vs. gift issue without getting into hot water regarding gift taxes. For example, consider the case of a no-interest loan from a family member (more on this sort of thing in a future post) wherein the provider of said loan agrees to furnish a gift letter for underwriting purposes, making it ‘officially’ a gift in the eyes of the underwriter, but unofficially an under-the-table loan amongst family members.
Please find an example gift letter below hosted as a PDF on our Scribd account for Jason Hartman: