I think the main reason gift letters are not used more often is that the buyer feels uncomfortable approaching family members for a “handout”, and possibly the obligation that goes with it. However, although the donor must state that they don’t require payback, there is nothing anywhere that says that the gift CANNOT be paid back. This changes everything! If the buyer says, “I will pay you back”, now it become a business proposition. Moreover, I think that there are a lot of family members that would be willing to gift money but are just never asked. And for the ones that aren’t inclined toward gifts, for whatever reason (they may think that giving their kids something that large is not good for them), now it’s not a handout, it’s a hand up!
Here are three actual examples of how my clients used gift letters:
In the first instance, the buyer that had a house to sell first and used a gift letter as a bridge loan so they could put in a non-contingent offer.
In the second instance, first time buyers had good income but no money down. However Fannie Mae allows gift letters for the whole down payment; so they got a 95% loan with a 5% gift letter and we negotiated closing costs from the seller resulting in a purchase with no out-of-pocket expense.
With the third example, the buyers had 5% down but using a gift letter were able to put 10% down in order to reduce the cost of the mortgage insurance: They saved $60.19 /mo. and $13,356 overall because they will be able to cancel it sooner. (I actually had a sale last year where the buyer used gift funds to put 20% down and eliminate mortgage insurance entirely).
As a buyer, you might be surprised at how much money is available to you, and how willing people are to help, once they understand how gift letters work.