Whether you’re a first-time buyer or an experienced one getting back into home ownership, receiving cash from a relative or other source is a great way to help make the down payment. Making a twenty percent down payment is so desirable because it helps buyers get better interest rates on their mortgage as well as avoid private mortgage insurance (PMI). But if you’re seeking a mortgage loan, as most buyers do, you need to be aware that depositing gifted money in your bank account is not as cut and dried as you may think. The source of your money matters to the lender just as much as how much money you actually have. In fact, your lender will require you to be transparent about what money was gifted to you and by whom.
The Underwriting Process
First, it’s important to understand underwriting when applying for a mortgage. Underwriting is the process of evaluating your assets, credit score, income, and debt to determine how high a risk you are to the bank with regard to being able to pay back a loan. The bank’s underwriter will take note of any recent large deposits in your account and will want to know the source. This is part of the process of ensuring that you’ll be able to afford ongoing mortgage payments, not just the down payment. The underwriter also wants to be sure that any money from outside sources are actual gifts, not loans.
The Gift Letter and the Money’s Paper Trail
Mortgage lenders allow cash gifts for down payment on a large array of loan programs including FHA loans, VA loans, USDA loans, conventional loans, and jumbo loans. But you need to ensure that you receive the cash gift properly so that the lender doesn’t reject your loan application.
If you plan to use gift money as part or all of your down payment, you’ll need the donor to write a letter as proof that the money is a gift, not a loan. The donor needs to include the following in the letter:
∙ Name, address, and phone number
∙ The donor’s relationship to the home buyer
∙ The dollar amount of the gift
∙ The date the funds were transferred
∙ A statement from the donor that no repayment is expected
∙ The donor’s signature and receiver’s signature
∙ The address of the property being purchased
The gift letter should be only as long as needed and should not contain “extra” information.
Make sure the donor knows that your lender will want to see the paper trail of where their money came from. For example, if your donor sold off stock, he needs to keep the documentation of the transfer of money from his brokerage to his bank account. Then he should write a check to you in the exact amount stated in the gift letter. Keep a copy of this check for the lender. Writing a check is a simpler way to document the transfer of money than wiring it.
Deposit the check into your bank account and do not “co-mingle” your gift deposit with other monies, nor with other gifts. The amount specified on your teller receipt needs to match the exact dollar amount on the certified down payment gift letter. If the amount is off by even a penny, the lender can reject your letter and the funds that came with it.
Note that if you’re receiving multiple cash gifts for a down payment, you must follow this process for each gift independently. Again, do not co-mingle the monies. Create a separate deposit transaction for each gift and amount on each gift letter.
Consult an accountant about tax implications for money you’ve received from a donor. The donor may have tax implications as well.
Gift Money Restrictions by Loan Type
There are rules surrounding how much money can be gifted and how much of your own money you need to use with regard to the type of loan you’re applying for.
Conventional Loans
∙ Down payments of 20 percent or more can come entirely from a gift.
∙ Down payments of less than 20 percent that come as a gift must also include some of your own money. The requirements of how much varies by institution and loan type.
∙ Gifted money can only be used on primary residences and second homes.
FHA and VA Loans
∙ FHA loans require a minimum of 3.5 percent as a down payment. Gift money may be used for all of the down payment with restrictions on approved sources.
∙ The donor may not be anyone who has an interest in the property being purchased, such as a realtor, broker, builder, or the seller.
∙ You can only use gift money on a primary residence.
Always check with your mortgage lender on up-to-date laws regarding gift money as requirements can change. It’s a wonderful opportunity to receive gift money. Follow the appropriate steps in your loan application process to ensure that you can use it as a down payment on your home.