If you are gearing up to give or receive a substantial financial gift, you should be aware of the importance of gift letters. Here are all the vital details you need to know about it.
A gift letter is a formal, legal document that is a valid legal device to explain why you received a (typically substantial) quantity of money as a gift. Many people wonder whether you would ever need such a legal instrument. The answer is relatively straightforward.
Lenders will analyze your financial accounts to verify assets and income when you ask for a loan. This procedure is known as underwriting. They will want to make sure you have the financial means to repay the money before they authorize any form of a loan.
A gift letter may well be your saving grace in terms of being accepted for your mortgage loan if you have recently received money from a family member or close friend to utilize as a down payment on a new property.
What Is a Gift Letter and How Do You Write One?
A gift letter is a legal instrument that indicates unequivocally that a friend or family member “gifted” you money rather than loaned it to you. A gift letter might be used to explain to mortgage lenders why a substantial sum of money unexpectedly appeared in your bank or savings account.
A sudden, unexpected rise in cash flow may frighten lenders. Indeed, it may raise concerns about your ability to repay your home loan. If you owe extra money on top of your mortgage (for example, money borrowed for a down payment), they believe you may not be able to repay both lenders. Traditional mortgage lenders may be wary of this because they do not want to be the party not paid back if your capacity to make payments on both loans is uncertain.
Various Formats of Gift Letters
Gift letters may be used in various situations, and knowing how and when could help you determine whether or not you need one.
For Estate Planning, a Gift Letter is a must-have. A gift letter might be a valuable backup to have on file if you received a substantial monetary gift that you do not expect ever to have to repay. It may be included in your Estate Planning documentation and should be kept in a secure, conveniently accessible, and ready-to-use location.
Even if you do not anticipate needing your gift letter right now, it is still a good idea to have one. When buying a property or applying for a loan, the last thing you want to have to deal with is having to verify that money was given to you as a gift. Having a gift letter for Estate Planning reasons is an excellent approach to avoiding future financial difficulties.
FHA Gift Letter – Perhaps you are looking for a particular loan, such as an FHA loan. FHA loans are universally guaranteed by the Federal Housing Administration (FHA) and are granted by an FHA-approved lender. They were created to meet the demands of low- to moderate-income borrowers and may tolerate specific lenient approval requirements. However, if you receive money as a gift to utilize as a down payment, an FHA lender would almost certainly need confirmation that the money was gifted to you.
Mortgage Gift Letter – A mortgage gift letter may help you save time and lower the chances of your loan being refused. Buying a property is difficult enough; having to show that you were gifted money at some point in the past might mean you miss out on that ideal forever home.
Gift of Equity Letter – Count your blessings and be wise about your future movements if you are one of the exceptionally fortunate individuals who discovered the unique chance of a family member or close friend selling your property for a fraction of its market worth. A gift of equity letter might explain the discrepancy between the selling price you paid and the property’s fair market value. A letter might say that you were the receiver of a gift of equity.
Parents’ Money Gift Letter – Most parents believe they desire to offer their children more than they have ever received. A money gift letter is sensible to ask your parents to add in addition to the generous monetary gift if they are inclined to gift you money to improve your financial future.
What Does a Gift Letter Require?
Yes, having a gift letter is perfect if you have gotten a substantial quantity of money as a gift from relatives or friends. However, it may not be significant unless it is very particular about how it is put up and provides relevant information. Include the following pertinent information in your gift letter:
The name of the donor
Relationship between you and the donor
The gift’s precise monetary value
The phone number of the donor
The address of the donor
When was the gift given?
A clear and detailed statement expressing unequivocally that no return is necessary or anticipated
The signature of the gift giver
Your signature is required
The address of the gift property you are buying (if applicable)
Is It Required to Notarize a Gift Letter?
It is not necessary to notarize a gift letter. It must, however, be signed by both you and the donor in it to be legal.
It should be all smooth sailing as long as the donor wrote the gift letter, and it outlines your connection (along with everything specified above) and is signed by both persons. That paperwork will very certainly be enough as evidence that you will not be required to repay any of the funds you received.
Is it Necessary for a Gift Letter to be Written by a Relative?
No, a gift letter does not have to be written by a relative. It may also come from a close friend, as long as it is evident that you and your buddy have a very tight and intimate connection.
Keep in mind that, although a gift letter is a good start, specific lenders may want more paperwork to verify that the money is indeed a gift. They may request copies of the donor’s bank records to check that they have sufficient funds to provide you. They may even demand a bank slip to prove the funds were moved.
How to Draft a Gift Letter
It is simple to compose a gift letter. It is usually a one-page document written in simple English and free of legal jargon, if not all of it. It may be pretty basic and uncomplicated, making it simple to develop on your own. There are several free online templates that you can reference to write a gift letter.
A gift letter is a simple yet effective legal device that you can use to your benefit. Writing a gift letter is not complicated, and it will potentially save you a lot of hassle in the future. A gift that allows you to acquire a house or other property might be one of the most monetarily valuable, sentimental gifts you will ever receive. Having a formal gift letter included in your Estate Plans, ready to use when and if the time comes, will ensure that you do not run into any issues.