Gift Funds for Mortgage Loans
Over the last 2 years, I have seen a significant increase in the use of Gift funds for mortgage loans in Maryland. There are a lot of very generous family and friends out there willing to help buyers to realize their dream of Maryland homeownership.
What are Gift Funds? Gift funds are monies GIVEN to the buyer with no expectation of repayment.
Who can Gift Funds for a mortgage? The money MUST come from an independent party that is not affiliated with the transaction and must have a documented relationship with the buyer. Gift funds can come from family, close friends (including fiancee) or employer. There are also down payment assistance programs that may be considered gifts. Gift funds may not come from a seller, realtor or lender.
Why do Lenders Care about Gift Funds? Lenders want to ensure that gift funds are not actually loans. A loan may increase a buyer's total debt ratio (the percentage a borrower's income of the new monthly housing payment and all other debt) beyond lending guidelines. They also want to ensure that the money is actually not an inducement for the sale. An example of such an inducement might be a seller agreeing to a higher purchase price and giving the buyer the money required for down payment.
How do I document Gift Funds for my mortgage?
1. Gift Letter: A letter must be signed by both the donor(s) and the borrower(s) stating that there is no expectation of repayment. Most lenders will have a form letter that can be used for gift funds. The Gift Funds on the letter must match the funds deposited EXACTLY. Do not deposit the gift with miscellaneous checks or money from under the bed.
2. The donor must document the ability to gift the funds. This means that they must provide either a bank statement or signed bank letter indicating the availability of the money in the donors account. Sometimes we find that the donor does not want to disclose more information than necessary to the borrower (Mom and Dad don't want their kids to know how much they have in their account) In that case, we suggest that the donor send the statements or bank letter to the loan officer directly rather than through the buyer. The cleanest and easiest to document is a check written on the donor's bank account. If funds are wired between accounts (more typical when the gift is more than a few thousand dollars, both the outgoing and incoming wires must be provided. If funds are from an international account (Yep, I have recently documented gifts in Euros and in Shekels!) the bank statement will need to be translated into English One donor had to involve the IRS prior to the transfer.
3. The buyer must document the reciept of the gift funds. There must be a documented deposit of the gift money (for the EXACT amount of the letter) shown in the buyer's bank statement or transaction history. The donor may choose to wire the funds directly to the title company for closing, so the title company would have to provide the proof of reciept of the funds earmarked for the buyer.
What happens if Gift Funds are not really a gift? Both the buyer and the donor are required to sign a letter documenting that there is no expectation or requirement that there be a repayment of the gift in cash or services. Should this not be the case, it would be considered fraud and if caught can result in fines and jail time.
IMPORTANT TAKE-AWAYS ABOUT USING GIFT FUNDS FOR YOUR HOME PURCHASE
1. Gift Funds MUST truly be Gifts!
2. If you are representing a loan or inducement to sell as a Gift you are committing mortgage fraud.
Mortgage Fraud is BAD!
3. DOCUMENT, DOCUMENT, DOCUMENT.
4. Your Loan Officer is not asking you for more documentation because we like it or because we are trying to make your life difficult. We are working to help satisfy lender requirements, make it VERY easy for an underwriter to follow the trail of funds and to get you to closing ON TIME.
If you are looking for a smooth loan approval, keep it simple. Make sure that you can document ALL deposits over $500 for at least the last 2 months of account statements (additional months may be required depending on your situation) that are not direct deposits (e.g payroll, tax returns, etc.) Minimize transfers between accounts and if possible contact your loan officer to discuss ANY transactions that may be out of the ordinary before you do anything. We are here to help you!
Please note, some lender may require a borrower document at least 5% of the purchase price of their own funds.
If you have questions about the use of gift funds when purchasing a home in Maryland or have any other questions regarding a MD purchase loan or a mortgage refinance in Maryland, don't hesitate to call. I am here to help!