An equity gift letter is a document used in real estate transactions to prove that a person is receiving a financial gift from a family member or friend to assist with the purchase of a property. The letter serves as proof that the funds are not a loan and do not need to be repaid. It is typically required by mortgage lenders to ensure that the down payment or closing costs are not borrowed funds.
When someone is unable to afford the down payment or closing costs on a property, they may seek assistance from a family member or friend who is willing to gift them the funds. In such cases, the equity gift letter is used to establish that the money is a gift and not a loan. This helps the borrower qualify for a mortgage and meet the lender’s requirements.
Why Do You Need an Equity Gift Letter?
If you are receiving a financial gift from someone to help with your home purchase, you will likely need an equity gift letter. Mortgage lenders often require this document to ensure that the gifted funds are not borrowed money, as borrowing for the down payment or closing costs can increase the borrower’s debt-to-income ratio and affect their ability to make timely mortgage payments.
An equity gift letter provides proof to the lender that the funds are a gift and not a loan. This helps the borrower meet the lender’s requirements for down payment and closing cost funds, as well as demonstrate their ability to repay the mortgage. Without a gift letter, the lender may consider the funds as borrowed money, which could lead to loan denial or additional documentation requests.
What to Include in an Equity Gift Letter?
When writing an equity gift letter, it is important to include specific details to satisfy the lender’s requirements. The letter should clearly state that the funds are a gift and not a loan, and that no repayment is expected. Here are some key elements to include:
- Names and Contact Information: Include the names, addresses, and phone numbers of both the donor (the person giving the gift) and the recipient (the person receiving the gift).
- Date of the Gift: Specify the date on which the gift is given.
- Amount of the Gift: Clearly state the amount of money being gifted.
- Relationship: Explain the relationship between the donor and the recipient (e.g., parent-child, grandparent-grandchild, etc.).
- Statement of Gift: Clearly state that the funds are a gift and not a loan, and that no repayment is expected.
- Signatures: Have both the donor and recipient sign and date the letter to confirm their agreement.
It is important to note that each lender may have specific requirements for the content and format of the equity gift letter. It is advisable to consult with your mortgage lender or broker to ensure that you include all necessary information and meet their guidelines.
How to Write an Equity Gift Letter?
Writing an equity gift letter may seem daunting, but it is a relatively straightforward process. Here are some steps to help you write an effective equity gift letter:
- Begin with a Salutation: Address the letter to the recipient (e.g., “Dear [Recipient’s Name]”).
- Introduce the Donor: Start the letter by introducing the donor and their relationship to the recipient.
- State the Purpose: Clearly state that the purpose of the letter is to confirm that the funds being gifted are not a loan and do not require repayment.
- Provide Gift Details: Specify the amount of the gift, the date it was given, and any other relevant details.
- Express Gratitude: Thank the donor for their generosity and support.
- Include Signatures: Have both the donor and recipient sign and date the letter.
- Notarize the Letter: Some lenders may require the letter to be notarized. Check with your lender to determine if this is necessary.
Remember to keep the tone of the letter formal and professional. Avoid using slang or informal language, as the letter is an official document that may be reviewed by mortgage lenders or other parties involved in the real estate transaction.