In what scenario would a borrower be needed to provide a Gift Letter?

A Gift Letter is typically required when a borrower's down payment is sourced from a family member. This documentation serves to confirm that the funds are indeed a gift and not a loan that the borrower will need to repay. It protects the lender by clarifying the nature of the funds being used, ensuring they are not increasing the borrower’s debt-to-income ratio, which could affect their ability to repay the mortgage.

When down payments originate from family members, lenders look for this letter as part of their process to assess the borrower's financial situation accurately. It outlines that the donor is providing the funds without any expectation of repayment, thus it acts as an assurance to the lender that the down payment is a legitimate gift and the borrower is not placing additional financial burdens on themselves.

In other scenarios, such as a borrower without any income or when an investment property is being bought, or when opting for a longer loan term, the need for a Gift Letter typically does not arise. In these cases, the focus is more on the borrower’s income stability, investment details, or payment terms rather than the source of the down payment itself.