Down Payments and Gifts
Financial gifts from your family can in fact be used for your down payment. However, using gift money is not always that simple. It’s not how much funds you have in your bank account that is the sole factor in determining your down payment. The source of the funds in your bank account will matter just as much as the amount of money you have available. Many become confused or even upset when they realize. To help you understand why the source of your funds matters to your mortgage lender, it will help you to understand how your loan is underwritten and how your down payment impacts your loan.
When underwriting a loan, the lender will look at such things as credit score, income and assets to determine affordability and qualification. During the underwriting, your assets are also reviewed, particularly, the amount of funds you have available for your down payment. They need to verify that the money in your account is in fact your money, and it has not been borrowed to incur another monthly obligation. Therefore, they will review any large deposits in your account to determine they are gifts, not loans, from your friends and family. This is to ensure that you are able to afford your mortgage payment and other monthly obligations. If you used a personal loan to qualify for a home loan, and this payment has not been factored into your underwriting, it could mean there is an underlying affordability issue that has not been reviewed or addressed. .
To determine if the deposits in your bank account are gifts and not loans, they will require a gift letter.
If you’re using gift money as part or all of your down payment, you’ll need the donor to write a gift letter to your mortgage company that makes it clear that the money is a gift and not a loan. The letter should originate from an immediate family member. If not, special exceptions will have to be made. A gift letter should include:
- The donor’s name, address and phone number
- The donor’s relationship to the client
- 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
- The address of the property being purchased
In addition to the gift letter, you will be required to provide evidence that the gift has been deposited into your account by way of bank statements that correspond to the gift letter. Sometimes, the lender will also require evidence from the donor by having them provide a bank statement in addition to a gift letter showing the funds leaving their account.
If you received your gift more than 90 days before your closing date, then the gift letter can be avoided as most lenders only require a 90-day history of assets for qualification purposes. As long as you have documentation for the past 90 days, the funds can be considered yours and not gifted.
In general, your underwriter will need to verify the source of any large deposit. What is a large deposit? It is rather discretionary, however we use $1,000 or 25% of your gross monthly income as a rule of thumb. So when an underwriter sees any large deposits in your account within the last 90 days (that do not pertain to your employment, they will ask for verification of source of those funds.
If you know that you’ll be receiving a financial gift to help with your down payment or that you have deposits into your account that do not relate to your employment (within 90 days of closing), you should be prepared to document it for your mortgage company and provide evidence of the source of funds.
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