Buying a house is expensive! With tighter mortgage restrictions, many borrowers find themselves without high enough down payments. Luckily, you aren’t stuck renting for the rest of your life. If you are lucky enough to have access to gift funds, you may still be able to get a mortgage. But, you must follow the rules. You can’t just accept money from someone and put it towards your home. There is a strict process you must follow.
You Need a Paper Trail
First, let’s look at the necessary paper trail. This is how lenders source the funds. They want to know where your money came from. You might wonder why they care. What’s the difference if Aunt Sally gave you money? Honestly, there is a lot to worry about. Banks need to make sure Aunt Sally didn’t give you a loan. They also need to make sure Aunt Sally didn’t borrow the money from somewhere.
Banks also care about the relationship between you and the person gifting the funds. Are you related? You can prove this to the lender. If you are not related, you may have a few more hoops to jump through. Generally, friends and acquaintances do not qualify as donors. In some cases, an employer or charity may be able to supply the funds, though.
Proving the Gift Funds
The biggest trick is proving the gift funds. There are two types of funds – those you haven’t received and those you have. You will verify them in different ways.
First we will cover gift funds not yet received. These are funds a relative or employer will give you, but has not yet.
The first thing you need is a gift letter. This is a statement from the donor stating they are providing you with funds. The letter should state the reason for the funds. It should also include the property address you intend to buy. It should also state that the funds are a gift and no repayment is required. The letter should include the date and the amount of the funds.
When the donor gives you the funds, it should be in the form of a cashier’s check. The donor should have his name printed on the check, though. Under no circumstances should you take cash as a gift. There is no way for the lender to track the funds.
The tracking continues, still. Don’t deposit the check in your account until you copy the check. Once you deposit the funds in your account, copy the deposit ticket. Once the funds are in your account and you have a bank statement showing it, you will need to provide it to your lender. This is how lenders track gift funds.
Now we will cover gift funds you already received. The process is similar with a few changes.
You still need a gift letter. It should contain the same information the letter should contain if you didn’t receive the funds yet. The donor must state the date, amount of money provided, and the intent for the money. There should be a statement that this is not a loan and the relationship between the donor and yourself.
All those requirements are the same as above. Here is where they begin to differ. Since you already received the funds, you can’t copy the check or the deposit slip. Instead, you must do the following. Ask the donor for a copy of the canceled check. Make sure to get a copy of the front and back of the check. If the donor doesn’t have the canceled check, a copy of all pages of his latest bank statement will work. The statement must include the canceled check, though.
In addition, you must provide a copy of your latest bank statement showing the deposit. Make sure to provide all pages of your bank statement, even the blank pages. The lender can trace the funds based on the date of deposit on your statement and the donor’s canceled check.
Clarifying Large Deposits
Keep in mind, underwriters look at your bank statements for the last 2-3 months. They look for large deposits. What if you received a gift from someone that had nothing to do with your mortgage? Or you got a bonus from work? You have to explain the deposits. The good news is you won’t have to explain every deposit. As a general rule, underwriters flag deposits that total more than 50% of your normal monthly income. So that $100 check from grandma for your birthday won’t have any impact. But, a wedding gift in the amount of $2,000 might, depending on your monthly income.
The best way to proceed is have proof of all deposits that are not your income. Anything out of the ordinary should be explained. If you show a canceled check from a gift, the underwriter can source it and move on. Of course, any odd circumstances will be evaluated. Keep this in mind as you get set to apply for a mortgage with or without gift funds.
Loan Programs that Allow Gift Funds
The good news is many loan programs allow gift funds. What they allow varies as follows:
- Conventional loans with a 20% down payment can be entirely gift funds
- Conventional loans with less than a 20% down payment may be part gift funds and part your own funds. The lender can help you determine the exact amount based on your circumstances.
- FHA loans can be entirely gift funds.
- VA loans can be entirely gift funds, although they don’t require a down payment, just closing costs.
The best thing to do is allow enough time for the processing of your gift funds. You know there will be a little more evaluation because there are funds involved that aren’t yours. Allow the lead time and provide the lender with proof of any deposits. This way you can avoid any delays with your loan processing.
Gift funds are a great way to buy and afford a home, but they can slow things down if you don’t do it right. Talk to your lender early on about the receipt of funds from a relative so you can make sure to proceed carefully.