If you are like me, I’m more than happy to take money you are just going to give away, no questions asked. If you are my underwriter, that wouldn’t be the case. You see, assets are a crucial element in analyzing risk so the source of the money used towards a down payment is carefully considered (If you want to know the reason behind this, leave a comment and I’d be happy to blog more about it).
If you are fortunate enough to have a family member provide you with a money, the first thing we are going to question is whether it’s a gift or a loan. A loan would imply that there is a payment. And a payment would need to be considered in the borrowers debt-to-income. A gift, however, suggests no repayment and has no strings attached. Our guidelines tell us that gifts can only come from family members since a gift from a non-family member smells
more like a loan. It may not make sense but again, I just follow the guidelines, I don’t make them.
If the funds are truly a gift, you must produce a letter signed by all parties that details the following:
- The name and relationship the donor (family member)
- The donor’s address and phone number
- The amount of gift
- Verbiage that clearly states the money is a gift where not repayment is expected
Now, be careful on how you receive the gift. Since everything has to be documented, you can avoid a paper trail by following this advice. Ask your donor to have their bank prepare a certified cashiers check with their name clearly identified as the remiter. Give a copy of this check to your lender and then hold it for safekeeping until your closing date.
Otherwise, if they write you personal check you will need a copy of that cleared check,and proof it was deposited into your bank account (bank statements). In some cases, the bank may even want pro of the donor had the funds available to give.
Avoid receiving a gift in cash! Cash is not document-able and as far as the lender is concerned, unacceptable assets.
*Again, speak with your lender about this subject and get their opinion on the best way to handle a gift. It can vary depending on loan product and more information might be required. This will at least give you some insight on what the industry typically wants.