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You might assume that money given to you is fair game to go toward your new mortgage, right? Surely the bank doesn’t care where you get your money as long as you have the right amount.
This is actually not true. Using gift money for a down payment isn’t as cut-and-dried as it seems. The source of the money in your bank account matters just as much as the money that’s actually in that account. The bank needs to be able to see exactly where the down payment came from before you can use it to close on a home.
To understand how gifted funds impact your home loan, we’ll have to go a little deeper in the mortgage process (but not too deep, I promise).
After you’ve applied for a home loan, an underwriter takes your complete application and goes through your financial information to make sure you actually qualify for the loan. Basically, the underwriter is deciding how risky it is to lend you the money you’re applying for.
The underwriter will look at your income, credit score, and your assets to determine your worthiness for a loan.
When an underwriter takes a close look at your assets, he or she will also look at the source of the money in your bank account. Regular monthly deposits from paychecks are easily explained, but anything large and unexpected will need to be looked at more closely.
A bank needs to look at any large amounts of money that were given to you to make sure lending you money is a good decision. If the down payment funds in your account were a loan, you’d have the additional financial stress of that loan, and this would make it less likely that you could pay the mortgage back. Lenders want you to owe only them for your house.
Here’s where that gift letter comes in. A gift letter is written by the giver to explain that you do not need to pay the money back to them, but it also includes a few other important details. Here are the main things the letter should include:
Depending on the loan and the situation, a gift letter may not be enough documentation for these gifted funds. The lender may also ask for bank statements or other documentation related to the money.
Make sure that you and the donor keep a strong paper trail for the money being gifted to you. For instance, keep records of stock sales, deposit slips, checks, and bank statements.
Important note: If you are receiving multiple down payment gifts, make sure to follow the process precisely for each gift.
Different loan types have different requirements about gift funds and gift letters. This is especially true for government-backed loans.
For instance, VA loans, which are available to active and veteran members of the U.S. military, don’t need a down payment at all, so any or all of the money can come from gifts. The requirements for proving the source of these funds tend to be more lenient, as well.
USDA mortgages don’t require a down payment either, so all of that money can come from gifts. These loans do require proof of transfer and the donor must prove the source of the funds for the gift.
FHA mortgages have low down payments (3.5%), and down payment gifts can come from family members or friends. These loans do require proof of transfer and the donor must prove the source of the funds for the gift.
Other loan programs may have different requirements for down payment gifts and for proving the source of those funds. If you have any questions at all, just reach out! I’m here to help make the loan process a smooth one for you and can help you and the giver know exactly what to do.