What is a gift letter and why is it required?

• A. A letter confirming the loan terms and repayment schedule
• B. A letter stating that down payment funds are a gift, not a loan; specifies donor, amount, and that there is no repayment obligation
• C. A letter authorizing the transfer of funds from one account to another
• D. A letter from the lender approving the loan

Answer: (B)

A gift letter is a document used in mortgage transactions to confirm that the down payment funds come as a gift from another person, not as a loan that must be repaid. It identifies who gave the money, their relationship to the borrower, the exact gift amount, and includes a clear statement that no repayment is required.

This is required because lenders need to verify the source of the down payment and ensure the borrower isn’t assuming unreported debt. If the funds were a loan, it would count as a liability that could affect the borrower’s ability to qualify or change loan terms. The letter helps the underwriter confirm that the down payment is truly a gift and often accompanies documentation showing the donor’s ability to give and that the funds are properly sourced and, if needed, seasoned.