Is it a gift or mortgage fraud?
If you're ready to buy a house, but don't have enough cash to make a down payment and cover your closing costs, you might want to ask your parents or other family members to make up the difference with a monetary gift.
A genuine gift, meaning no repayment is expected or implied, can help you qualify for a mortgage. But a "gift" that is really a loan in disguise could be problematic or even considered loan fraud, a federal crime with serious consequences.
That distinction, between a genuine gift and loan fraud, is precisely why mortgage lenders require a so-called "gift letter" to document that any gift you get is in fact genuine.
This type of letter simply states that the money is "a bona fide gift that will never have to be repaid," says Joe Metzler, a mortgage specialist at Mortgages Unlimited in St. Paul, Minn.
What a gift letter says
Typically no longer than a page, a standard gift letter states the amount of the gift, the source of gift-giver's funds and the relationship between the two of you, Metzler explains. Statements that the gift will be applied to your home purchase, you are not expected to repay the gift, and the money wasn't obtained behind the scenes from the seller, loan officer, real estate broker or anyone else associated with the transaction are also typical components.
Both the gift-giver and you, the recipient, will have to sign the gift letter. Signatures do not need to be notarized.
You will also need documentation to back up the gift letter, according to Peter Thompson, a senior loan officer at Prospect Mortgage in Naperville, Ill.
"The gift letter by itself isn't enough," Thompson says.
Documentation depends on loan type
If you are applying for a conforming loan that your lender can sell to Fannie Mae or Freddie Mac, the only additional documentation you will need is a bank statement that shows the gift was deposited into your account. The general rule for conforming loans, Metzler says, is "sign the gift letter, prove the money is in the bank and that's pretty much it."
If you are pursuing an FHA loan, you'll need to provide an entire paper trail of bank statements that follow the gift money from the giver through the financial system to you. In this case, Metzler explains, you will have to "sign the gift letter, prove you got the money, prove it's been deposited and prove it's cleared."
If you are applying for a jumbo loan or other type of financing that is neither conforming nor FHA, the lender's guidelines will dictate the necessary gift-letter documentation.
The sticking point is often the gift-giver's reluctance to disclose his or her financial position as shown on those bank statements or other documents. One workaround is for the giver to send the documents directly to the loan officer, who can protect the gift-giver's privacy, Thompson suggests. Lenders will not accept partial documents or documents that have information blacked out, so that is not even an option.
When should I present the gift letter?
It is best to submit the gift letter and documentation as early as possible in the loan process. However, some of the paperwork can be rounded up later as long as it is all turned in and approved by the lender prior to closing. The gift-giver can transfer the funds directly at closing as well, if all the documentation has been approved in advance. Again, though, sooner is certainly better, Thompson says.
You can actually avoid the letter altogether
The look-back period to establish whether money is or is not yours is only two or three months, which means you can avoid both the gift letter and documentation altogether if you deposit the funds into your own account at least that long before you apply for a mortgage. This strategy doesn't negate the genuine gift requirement, however. If the money involves any expectation or implication of repayment, it is not a true gift, but a loan that will have to be disclosed and could affect whether you will qualify for a mortgage.
Gift may be minor risk factor
Whether a gift will help or hurt your loan application is not easy to figure out. Buyers who bring 100 percent of their own money to the transaction demonstrate a bit more financial responsibility. But if you are otherwise well-qualified to get a mortgage, a gift that helps you make the down payment, pay the closing costs and perhaps keep a larger cash reserve generally should not hurt your chances.
"In most situations, as long as you meet the guidelines, a gift won't be a big problem," Thompson says. "If you have a lot of other risk factors, that would probably be put into the equation as an aspect of the risk."
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