What Is A Gift Letter? Why Is It Necessary While Taking Loans?

A gift letter is a necessary, legal, and formal piece of document. It may help explain that a considerably large sum of money was only a gift to you. Why would you need it? Well, the reason is simple.

Let’s say you are applying for a loan. While underwriting, the lenders review all your financial accounts for the verification of your assets and income. Before getting to the approval part of it, they would want to make sure that you have enough financial means to be able to repay all of the money.

If you have recently received a gift letter from a friend or anyone in your family, it may just act as a saving grace when it comes to the approval of the mortgage loan.

However, the concept is not as easy as it looks like. There are a lot of things to know to write or receive one. In this article, we shall discuss in detail what you need to do when it comes to a gift letter. So, without any further delay, let us get started.

What Is A Gift Letter?

A gift letter is a legal document that very explicitly and clearly states, without any question, that a family member or a friend has “gifted” you the money. Not loaned it. You may use it for the lenders who may question the large amount of cash that abruptly showed up in your savings or checking account.

The lenders might be suspicious of an unexplained and sudden increase in the cash flow. In fact, it may also lead to inquiries about whether you will be able to pay back the mortgage loan that you take. In their opinion, if you owe any money in addition to your mortgage, you may not be able to pay the lenders their money back.

Traditional mortgage lenders may also be wary about it. This is because if your ability to pay back both loans is in question, they would not want to be the party who is not paid back.

Types Of Gift Letters

If you think that there is only one type of gift letter, you are wrong. There are different ways in which one can use a gift letter. Therefore, it is important that you understand when and how they come to play. So you would know if you at all need one.

Gift Letter For Estate Planning

If you ever receive a huge sum of money that you do not expect to pay back, a gift letter could be a nice back to keep on record. It may be a part of the documents for your Estate Planning. Therefore, it is something that you would want to keep in the safest place. However, make sure you can easily access it and it’s all ready to use. Even if you are not sure about it now, it’s still one of the best ways to protect yourself.

The last thing that you would want while purchasing a house or a property is to prove that the money that came to you was, in fact, a gift. Getting a gift letter for the purpose of estate planning is one of the best ways to throw away all of the unnecessary troubles in the future whenever it comes to securing the funds.

Gift Letter For Mortgage

A mortgage gift letter may save you time and reduce the risk of denial of your gift letter. Applying for a loan in itself can be stressful. Over that, having to prove that the money you have is a gift can be more stressful.

Gift Of Equity Letter

If you are among those lucky people who got the rare opportunity of a friend or a family member selling you a house or a property at a price that is much less than the market value, take it as a blessing and be witty about your next moves. A gift of equity letter clearly states the difference between the actual price of the property and the price that you pay for it. The difference is what we call the gift of equity, and the letter states that you were the recipient.

What Are The Requirements For A Gift Letter?

Yes, it is ideal to have a gift letter if you’re receiving a big sum of money as a gift. But, unless it is specific in terms of how one has set it up or what information is provided, it may become useless. Therefore, you need to make sure that it includes the following:

• The name of the donor
• The address of the donor
• Phone number of the donor
• The relationship of the donor with you
• The exact amount in dollars
• Date the gift was given to you.
• A comprehensive and complete statement from the donor. It should explicitly state that the donor does not expect or require any repayment.
• The signature of the donor
• Your signature
• The address of the purchasing property (if applicable)

Is It Necessary To Notarize?

No, there is no need for you to notarize. However, you and the donor have to sign the document for it to be valid.

As long as the donor writes the gift letter, it clearly explains the relationship that they have with you, and has both of your signatures, it would just be fine.

Does A Gift Letter Always Have To Be From A Family Member?

Not necessarily. It is nowhere stated that the gift letter has to be from someone within the recipient’s family. It can be from a very good friend as well. As long as you both have a clear and close relationship with one another.

You need to keep in mind that a gift letter in itself is one of the greatest starts. However, some lenders might ask for further information to make sure that the money is actually a gift. They may even check the bank statements of the donor to make sure that they have enough money to give to you. Some may even ask for a bank slip to show that the money was actually transferred to you.

The Bottom Line

A gift letter is a written document that acts as proof that someone close to you has gifted you with a huge amount of money. And that they do not require you to pay it back. This letter is a requirement by the lenders while issuing home loans or mortgages.

For this, the donor has to clearly mention that the money is a gift and there is no need for repayment.

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