GIFTING FOR DOWN PAYMENTS

  Another issue that has become a bit pricklier as lending goes is the use of gift money for down payments.  A brief stroll down memory lane might be in order before I go into depth on the subject of gift money.

  Pre-2008 a borrower could come up with money from pretty much anywhere for the down payment. They could ask someone, anyone, to write a "gift letter" and have the money accepted as a part of the down payment for a mortgage.  What this acceptance did was open the door for some very egregious practices-such as taking cash advances on credit cards, opening high interest rate signature loans, accepeting seller contributions, or obtaining money from other questionable sources. With the collapse of the housing market, overvalued homes, and all that came with it, the Federal Government along with it Fannie Mae, Freddie Mac, and FHA began the process of looking more carefully at where the money for down payments originated.

   Tthe new rules of the road were changed so that the money for down payments had to be traceable and that  included gifts. 

First: the rules pertaining to who may give a gift has been tightened up.  The donor has to have a proven relationship to the borrower-so family members, afianced couples, as long as they have bank accounts and addresses in common, are acceptable donors for gifts.  The relationship has to be verifiable-in some cases where names have changed due to marriage, we have had to go so far as to obtain marriage licenses and birth certificates to prove the relationship.

  Secondly, the money can't just turn up in the borrower's bank account. It must be proven that the donor has the money to give.  This is one of the most controversial parts of the new law.  The money for the gift must be verified in the bank account of the donor prior to dispersal of the gift money. Many donors are resistant to this part of the process.  What business is it of the lender to check where the money is stashed?  Federal Finance Reform makes it the lender's business.  Unfortunately for those of us who wouldn't know a terrorist if one sat down next to us on the bus, banks are now the first defense against money laundering. (If you will recall, the 9/11 high jackers had large sums of cash rolling through their bank accounts-threfore banks are required to look at all large sums of money used in various banking transactions-mortgage lending being one of them.) However, proof of the assets can be easily achieved by producing a copy of the donor's bank statement showing the money available before the actual check or transfer is/was made.

 Third-a copy of the check or wire transfer slip may also be required. 

Fourth-the lender will want to see a deposit for exactly the same amount as the aforementioned check or transfer go into the borrower's account.  A "gift letter" which is actually a form that is produced by the loan originator's software will have to be filled out and signed by both the donor and the receiver.  The gifting process isn't exceptionally difficult if it is done correctly from the beginning. Here is where we run into trouble:

  If the donor has cash sitting in the sock drawer and gives the cash to the borrower, the money may not be used.  Unsubstantiated cash into a bank account cannot be used as funds to close a loan. Who says so? Uncle Sam says so and lenders are required to adhere to Federal Law. 

  If you are using a conventional loan to purchase your home 5% of the down payment must be the borrower's own funds.  Any other funds towards the down payment can be a gift. (As of this writing the rules is 3% of the borrower's own funds, however that rule is due to change to 5% within a month or two.)

  With an FHA loan all of the down payment or the entire 3.5% can be gift funds from a family member.  In certain circumstances, a borrower can buy a property from a family member and have the 3.5% gifted as a gift of equity-but that is a bit of a different animal and other rules apply also.

  VA loans and USDA loans do not require down payment funds.  However, it is important to note that even these loans have upfront costs attached to them such as inspections of various types, the appraisal, and so forth.  If a family member is gifting you the money for your appraisal for instance, once again it is important that you document the gift in the same manner as down payment gifting.

  A gift from a family member is an excellent method of obtaining down payment funds for the purchase of a house. Many families are supportive of their children purchasing a home.  Home ownership is a proven method of building net worth. It also builds stability and community.  So don't be afraid to use a gift to buy a home-just follow the rules and it will be easy.