Hey there, friend! Get comfortable, because today we’re diving deep into the ocean of home buying – particularly into a hidden treasure called a ‘Gift Letter’.
So, What’s a Gift Letter?
Picture this: Mama and Papa Smith offering you a nice, fat cheque to help buy your dream home. But instead of popping champagne, your lender wants a note from mommy and daddy affirming that it’s a real gift and not a loan disguised as one. And there we have it: a gift letter! These written pledges are a way to tell those oh-so-cautious lenders (and needless to say, state and federal regulations compel them to be) that ‘no lender, we’re not using borrowed money, we just have generous relatives’! Every little detail about the money – the flavorful sum, the gracious donator, and the warm-hearted intent – is laid down in this letter, depending on several factors like the regulations and the lender’s requirement.
After all, as generous as your Uncle Sam might be, you cannot pay your mortgage off using just goodwill, right?
Is This Gift Letter Thingy Legally Binding?
Well, of course! Who’d have thought a simple letter can have the mighty power of a binding contract? Just get your benefactor and yourself to sign it, and voila, it’s a done deal! But, make sure you confirm with your lender whether they have any specific template for this ‘just a letter’ scenario. Some banks have standardized gift letter forms, smarter to use those and save yourself from the doom of incorrect format.
Asking for a friend – Is It a Legal Requirement?
Strictly speaking, Uncle Sam doesn’t particularly ask for gift letters when you’re borrowing money, it’s the lenders who insist on having them. Ever since the subprime mortgage crisis, well, they’ve become more paranoid for lack of a better word. More power to them, right? And since every lender is a different bandicoot, you may want to huddle up with them and discuss what documentation they need. It sure ain’t one-size-fits-all!
But Who’s Handing These Fund-Gifts Out?
We’re not in the Stone Age, you’re not receiving funds from Fred and Wilma Flintstone. So yeah, the donors need to pass the eligibility criteria. These sacred norms depend upon the type of loan and the ‘rules’ of the lender. For instance, some loan programs only accept funds from blood relatives. Others are a little more friendly and allow even godparents and stepparents to donate. Quite a few even accept friends or nonprofit organizations to make a contribution. So yes, best to consult with your lender and not make a hasty move!
And What’s Supposed to be in this Letter?
Here’s something useful: a rundown of everything that should go into your letter. The donor’s full name, whereabouts, contact number, and relationship with you. Also, the gift amount, source, and specific intent (like being a down payment towards your new home). Follow it up with the date of fund transfer (if you have it) and the address of your potential property, and have the donor signed off on it. Clear as spring water, right? Just one thing, make sure your letter clearly proves there’s no repayment obligation involved. Some lenders – like the FHA loans guys – might ask for additional paperwork like the donor’s bank statement, so always keep your individual loan terms on speed dial!
Here’s a Million Dollar Question – How Much Can Be Gifted?
Now now, don’t get too fancy! Lenders don’t like to give you lottery-like surprise checks. They need to know you’re good for the loan too. But that being said, you can actually be quite flexible with the gift amount, it all depends on the loan type, borrower and required down payment. Remember though, Uncle Sam expects a 3.5% down payment if you’re credit score is over 580, if it’s lower then you gotta cough up 10%!
Whoa, Can I Repay this Gift? (wink wink)
Woah, hold your horses! You can’t payback a gift now, can you? It’s a gift, not a hidden loan. If you suddenly develop an urge to return the money, that’ll just make it a loan and ruin your loan eligibility (and frankly, it’s such a joy-kill!). And talking about illegal, did you know that misrepresenting a loan as a gift is also mortgage fraud? A serious federal offense no less!
I Already Have a House, Can I Still Use Gift Money?
Well, aren’t you lucky! Guess what, you can use it for your second home as well. But, the lenders are a tad cautious and generally require at least 5% of the down payment to come directly from your pocket for a second home or an investment property.
Gift Money and Our Dear Old Friend, Taxes
Honestly, where would we be without the IRS making everything so much more fun? So, according to these folks’ guidelines, most of the time the gift tax is paid by donors (unless, some sneaky arrangement is made to have the recipient pay). They also cannot be deducted from federal income tax. Plus, as per IRS, a ‘gift’ is defined as any money transfer to another party, either directly or indirectly. Funny things, these definitions!
Finally, How to Document a Gift?
My dear Watson, this one is elementary! Keep hold of every little paper trail associated with the gift – the donor’s bank statement, your statement, records of any wire transfers, images of the check and your deposit slip, and most importantly, the closing disclosure or settlement statement showing the gift deposit. And while you’re playing detective, you could also ‘season’ the funds by keeping them in your account for a couple of months. This usually satisfies lenders with proof of the source of funds. But as always, keep in touch with your lender and a licensed professional before you do your victory dance.
Phew, that did seem like a whirlwind, didn’t it? But don’t be daunted. Just remember to cross your ts and dot your is and you’ll have breezed through the maze of the gift letter and its intricacies!