Important information for anyone buying a house and using gift funds for their down payment…
Earlier this week, I attended a closing for one of my listings. While it did close, it closed almost 2 months late.
It wasn’t my fault…
It wasn’t the Buyers Agent’s fault…
It wasn’t the seller’s fault…
It wasn’t the buyer’s fault…
It wasn’t even the loan officer’s fault
As is the case with many real estate transactions, the delay was because of the lender or underwriter. Because of the much tighter mortgage guidelines for home buyers, how much down payment is required has increased. Which is part of the reason why this week’s closing was delayed
The Pendulum Swing
Instead of talking about how just a few years ago anyone with a pulse could get a mortgage, I am going to focus on what IS instead of what used to be. And today, most mortgages require at least 3.5% to 10% down. This is in addition to the closing costs.
While getting some help from family members when buying a home is nothing new, the way lenders make buyers jump through hoops and thoroughly document everything has changed. Plus the number of home buyers accepting cash gifts from family to help them buy a home has increased in recent years.
Nothing Wrong With a Gift
Let me make sure you understand that there is absolutely nothing wrong with a gift. Well, other than that ugly sweater my Grandmother got me when I was 10….
But when you are buying a house, you are allowed to get help from a family member. This is called a gift. Gifts are allowed in most cases. However you must accept the gift in a way that the lender does not have any problems with. If you do not do every little thing exactly the way the lender wants, then the mortgage underwriter could reject it.
Which means no mortgage!
3 Important Things You Need to Know
It is very very important that you talk to your loan officer and follow their instructions to the letter. Please do NOT call up your family and start depositing large sums of cash into your bank account. You MUST follow these steps:
- Provide an acceptable gift letter signed by all parties
- Provide documentation of the gifter’s withdrawal of funds via teller receipts
- Provide documentation of the giftee’s deposit of funds via teller receipts
The lenders require these 3 steps for two reasons. First, they want to make sure that the cash gift is “clean” (i.e. not laundered). Second, they want to make sure the gift is really a gift and not a loan-in-disguise. It’s why lenders typically require that the loan application be accompanied by a signed, dated letter.
Here is an example:
I am the [relationship to recipient] of [name of recipient] and this letter serves as evidence that I am gifting [name of recipient] [amount of gift] to be used for the purchase of the home at [complete address of property]. This is a gift — not a loan — and there is no expectation of repayment. Signed, [Signature of gifter]
Got To Keep Them Separated
Another super important thing to remember is you must keep the gift money separate. You need to make sure that gifted money is not commingled at the time of deposit.
Make sure you deposit just the gift and nothing else. If the cash gift is for $5,000, the bank’s deposit slip should be for $5,000. Nothing more, nothing less, no ands, ifs or buts allowed.
Also, you and your family need to know that gifting funds between family members can create both legal and tax liabilities. I strongly suggest talking to your tax and financial person to ensure you reduce any negative consequences.
If you’re unsure about how donating or receiving a gift may impact you, talk to your lender at the beginning of the home buying process. The rules, laws and regulations are constantly changing and you really need to discuss the specifics with your mortgage professional!