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.
“CSMC Mortgage took great care of us and our home buying needs. Tony was more than we could have ever asked for, he went above and beyond for us and we couldn’t have been more grateful for all his hard work. CSMC Mortgage has a great and friendly staff, I would highly recommend them to anyone looking into buying a home.”
- Jannet A.
“David Honda and his team rocked!! They had great technology that took so much of the pain of home buying away. They were attentive to our specific needs and were on top of our loan process! David was always available, even when he was in Hawaii, and super responsive! Thanks David, Melissa and the team for an easy and great home buying experience.”
- Raymond F.
“These folks are conscience and easy to work with. The “calm” as the “storm” of home loans rolls through! I would not use anyone else. They make sure ALL your questions are answered, be that what competitors may have offered, or ads you may have heard or seen. What a pleasure to do business with. Thank you team CSMC.”
- Michael G.
“With this being my first home purchase, my loan officer was very good at explaining everything to me and helping me with all my needs. Thank you for having such great people in the right place!”
- Cathleen H.
“Faye helped me purchase my first home last year. She was very professional and worked very quickly to help me procure financing. She made herself available around my schedule and took the time to explain my options for financing to help me get the lowest rate possible. Would highly recommend her to anyone looking for someone that is professional, highly knowledgeable, polite, and responsive.”
- James Z.
“This review is about Mark and Darci Richardson from CSMC Mortage in Simi Valley. This team is the BEST! For the past 12 years our home was "underwater" due to the "crash" in 2007, and unable to do anything with the mortgage except pay it. These two kept on top of things and finally the house qualified to REFI. We just completed everything and it closed last week... and they saved us over $900 a month!! That's a huge savings for a couple of senior citizens! We are SO happy now and finally can breathe. Thanks to Mark and Darci and CSMC Mortgage for following through, jumping through all the hoops necessary and helping us out! I can't recommend them more... they are the BEST!!!”
- Shari S.
“I had the best experience with CSMC Mortgage. Buying a home is very stressful with all of the paperwork that has to be filled out. Faye was amazing! I have given several people her contact info, who are scared to take the step to homeownership. She took ALL of the stress away for me. I honestly, didn’t have to do much. She accommodated my crazy work schedule and help me get things done in a timely manner. She made me feel so comfortable and at ease. There were no surprises when it was time to sign and pay. I highly recommend her to anyone in need of her services and guidance. I can’t thank her enough.”
- Lisa M.
“Baret Grigorian was amazing!! From start to finish Baret was there to help in every way. I never felt like I had to call him to follow up on my loan transaction and he always kept me informed. He was able to get me great financing rates, a lower payment AND money back! Thank you Baret!! I look forward to working with you again in the future!!”
- Kenny D.