Gift Letters: Using Gifted Money for the Purchase of Your Colorado Home
Are you buying or selling a home in Colorado? Is the Buyer considering using gifted money to help finance the transaction? Are you familiar with the home buying process and how gift money may alter a party’s obligations? GLO consults with home buyers and sellers to ensure peace of mind while they go through one of the largest investment decisions of their lifetime.
How does a buyer use gifted money?
Purchasing a home is expensive, and homebuyers often rely on gifted money. Before someone can use gifted money for the down payment on a mortgage, a gift letter from the gift donor must be provided to the lender. A gift letter tells the mortgage lender that the money provided for the down payment is a gift, not a loan, and the donor does not have to be paid back.
Lenders require a gift letter from the person giving the gift so they can be sure the homebuyer doesn’t owe anyone else money for the home. GLO specializes in helping people buy homes in Denver or anywhere along the Front Range, including those using gifted money as a down payment.
What is an underwriter and what do they do?
After a homebuyer has applied for a home loan, an underwriter analyzes the homebuyer’s application and goes through the homebuyer’s financial information to make sure the homebuyer can qualify for the loan and to determine risks associated with lending to the homebuyer.
Lenders have financial eligibility requirements, and the lender will scrutinize the homebuyer’s credit history, credit score, income, assets and debts to determine worthiness for a loan. An underwriter will typically look at the current money in a homeowner’s bank account and its source. Any large and unexpected deposits will be closely scrutinized.
What if I have enough money for the down payment?
Lenders are primarily concerned with a homebuyer’s financial fitness. Even if a homebuyer has the money for the down payment, it doesn’t mean the homebuyer is financially fit to keep up with the monthly mortgage payments. Lenders look at money in a homebuyer’s bank accounts to make sure the homebuyer doesn’t owe anyone else money on the home.
When loaning money to buy a home, lenders have to be sure that if you default on payments, they will still receive payment if the house is foreclosed and sold. Lenders need adequate assurance their loan will be paid back.
What is a gift letter and why do I need one?
A gift letter assures your lender that the gift donor is, in fact, gifting you the money and releases any obligation for you to pay the donor back. The letter must also include the address of the home being purchased, the donor’s contact info, the donor’s relationship to the homebuyer, the exact amount and date of the gift, a statement that the home buyer does not have to repay the loan, and the donor’s signature.
Lenders may also require the donor to provide a paper trail for the money they’ve gifted. Generally a gift letter must be provided by each gift donor for any single deposit that exceeds 50% of the total monthly qualifying income for the mortgage.
Can I apply gift money to my mortgage? Is there a limit?
Yes. You can apply gift money to down payments for a mortgage on primary and secondary residences. There is no limit on the amount someone can gift you. However, gifts over the annual threshold must be reported. For 2021, the annual exclusion for gifts is $15,000, meaning donors can give up to this amount without having to report it. Gifts over this amount must be disclosed and the donor will have to file a gift tax return. This means that the amount will be applied to the donor’s lifetime gift tax exclusion, which dictates how much money someone, in their lifetime, can gift another without paying gift taxes.
Depending on the loan and property type, some lenders require homebuyers to contribute a certain percentage of the down payment from their own funds – not gifted funds. Gifted funds cannot be used for investment properties.
How can GLO help?
Gift money is one example of a complication in the home buying or selling process. GLO has the expertise to ensure that your transaction goes smoothly.
If you’re buying or selling a home in Colorado, GLO offers one hour consultations to help either side understand their rights and obligations to ensure an easy transition into one of the largest investments of their lifetime.
Please fill out an Intake Form to inquire about working with GLO.
GLO has prepared this blog to provide general information on legal issues that may be of interest. This blog does not provide legal advice for any specific situation and this does not create an attorney-client relationship between any reader and GLO or its attorneys. GLO engages clients only through specific fee arrangements and signed engagement letters. GLO does not guarantee any results.