Gift Letter Certification represents a final document that is commonly used by parents or close relatives when they make a gift of money for children's use. It is a part of the down payment. The gift letter might be required by the mortgage company or the children’s bank. In that situation the bank might consider this document as a gift from parents to their children to evaluate the children's loan application. They might require a signed letter from the parents with the statement that the money was in fact not a loan but a gift. An example of the Gift Letter Certification is attached below.
"A gift letter is a letter from your parents or a close relative confirming that they are giving you a gift for you to use as a deposit to buy a property.
Lenders need to confirm the source of a borrower’s deposit to make sure they are not borrowing the deposit off credit cards or a personal loan (M. Shenkman W. Boroson 1995, s. 127-128)."
Types of the gifts
Below are the basic types of gift letters:
- Cash, check or other tangible items
- Debt that is forgiven
- Below-market loans
- A title to stocks or real property that are transferred and not compensated by anything in exchange of value (Gift letter, 2018).
Every year the maximum value of the gift is agreed and in case it is exceeded it should be reflected under income taxes (M. Shenkman W. Boroson 1995, s. 127-128). When parents would like to help their children with entering to the housing, it is quite difficult when they don’t have cash. To help them with a down payment parents use a variety of possibilities to obtain the cash.
One of them is the equity in their own homes like a home equity loan.They can tap it and the gained money might be used on the children’s new home toward the down payment. Parents can be able to deduct the interest that they pay if the total sum of the home equity loans that they have outstanding is not higher than $ 100000. The sum of up to $ 100000 of home equity might be tapped up for any reason and parents are allowed to deduct the interest on it. If only a part of their $ 100000 equity line is used, they can deduct just part of the interest (M. Shenkman W. Boroson 1995, s. 127-128).
The second option is the parents rental property. They are allowed to refinance the property or a second mortgage can be taken out. As a result they may provide all or a part of the proceeds to their children as the gift (M. Shenkman W. Boroson 1995, s. 127-128).
The third possibility appears when the parents possess bonds or stocks appreciated in value. They can give children those bonds or stocks to allow them use toward the down payment. The children might sell them and as a result they might be in a lower tax bracket comparing to their parents. Therefore, the tax sale cost will be lower (M. Shenkman W. Boroson 1995, s. 127-128).
To sum up, the gift letter is commonly used as a tool to finance the down payment (M. Shenkman W. Boroson 1995, s. 127-128). A general definition of the gift letter contains a sale, exchange or another kind of property’s transfer from the donor to the recipient ( Gift letter, 2018). Every year the maximum value of the gift is agreed and in case it is exceeded it should be reflected under income taxes (Gift letter, 2018).
The gift latter template
"If a relative or friend will be giving you money to help make a down payment on or purchase a house, your bank and lender will likely require some type of written documentation that the money is in fact a gift, not a loan. The reason is that if it's a loan, you will be deeper in debt than the bank had earlier calculated. In that case, you may no longer qualify for the same loan terms the bank had offered, or perhaps any loan at all. Before finalizing the letter, check with your lender to make sure that it includes all information the bank requires, such as evidence of the donor’s ability to provide these gift funds." (Stewart M., 2008)
"I, [name of the donor] do herby certify the following:
Have made a gift of [amount] to [name of recipient] [relationship, such as daughter or son].
This gift is to be applied toward the purchase of the property located at:
- [address of the property: street, city, zip].
No repayment of the gifts is expected or implied either in the form of cash or by future services of the recipient.
The source of this gift is [describe the investment, bank or the other source the gift is coming from]
- [signature of donor]
- [print or type name of donor]
- [address of donor]
- [phone number of donor]
- [signature of recipient]
Upon the signature(s) of this gift letter, I/We hereby certify that any funds given to the homebuyer were not from any person or entity with an interest in the sale of the property including the seller, or loan officer, real estate agent broker, builder or any other entity associated with this transaction" (Stewart M., 2018).
- Personalized gift system and methods (2018), "Patent Application Publication", No. US 2018/0322554A1
- (2019), "Investopedia"
- Shenkman M., Boroson W. (1995), How to buy a house with no (or little) money down, Law Made Easy Press L.L.C, New York, Chichester, Weinheim, Brisbane, Singapore, Toronto, s. 127-128
- Stewart M. (2018), "NOLO", Sample Gift Letter for Use When Taking Out a Home Loan.
Author: Jakub Pałkowski, Joanna Krygowska