What is a 'Gift Letter' in the context of mortgage applications?

A 'Gift Letter' in the context of mortgage applications is a document that confirms that a down payment is being provided as a gift from a family member or friend, rather than as a loan that the borrower will need to repay. This is significant because many lenders have specific requirements regarding the source of the down payment. Acknowledging that the funds are a gift helps ensure that the borrower is not taking on additional debt that could affect their ability to qualify for the mortgage.

The gift letter typically includes information about the donor, the relationship to the borrower, the amount being given, and a statement that the funds do not have to be repaid. This clarity is vital for lenders as they assess the borrower's financial situation and commitment to repaying the mortgage. In contrast, other options like mortgage repayment terms, income verification, or confirmation of funds availability do not specifically address the nature of the gift, which is why they do not define a 'Gift Letter.'