What is required when using gift funds in a real estate transaction?

When utilizing gift funds in a real estate transaction, a gift letter from the donor is essential. This letter serves as documentation that outlines the specifics of the gift, including the amount, the relationship between the donor and the borrower, and a statement confirming that the funds do not have to be repaid. Lenders require this letter to verify that the money is indeed a gift and not a loan, as loans could affect the borrower's debt-to-income ratio and overall eligibility for the mortgage. This clear distinction helps lenders assess the borrower's financial stability during the underwriting process.

The other options are generally not requirements in this context. A tax return from the donor is typically unnecessary for confirming the gift, as the donor does not need to prove their financial situation to validate the transaction. Title insurance is related to protecting the buyer's ownership rights and does not pertain specifically to the source of funds for the purchase. Similarly, proof of income from the borrower is important in general mortgage approval processes but is not specific to the use of gift funds. Thus, the gift letter is the key document for ensuring compliance with lender requirements.