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Refinance & Mortgage Tips: Down Payment With Gift Letter
By: Tristan Hunt
If you are a first time home buyer who has been out shopping for that dream
house, you’ve probably already heard your real estate agent or property
developer’s first question: “How much will you be putting down?” If you have
excellent credit, several years of consistent income on record and a relatively
long history of using credit wisely, you may qualify for 100% financing, often
referred to as a “No Money Down Mortgage” or “Zero Down Home Loan”. But for the
majority of new borrowers, a down payment is a prerequisite to buying a house,
and finding 20% to 30% or more of the purchase price of a house can very often
entail getting the money from family or friends. Getting that much money
together can be tricky enough, however lenders will also require that every
dollar used for a down payment be documented back to a specific funding source,
and this can be particularly difficult when the money comes from a third party,
which is why we have “Gift Letters”.
Newlyweds and young people generally have neither sufficient credit history nor
income consistency to qualify for 100% financing, and are also the least likely
to have sufficient savings and acceptable documentable assets to actually come
up with the cash to make the down payment. Members of the family are in some
ways the best and very often the only available source of down payment
assistance available to “green” borrowers. Your lender generally will only allow
you to use money given to you by a true family member, i.e. your mother, father,
brother, sister, uncle, aunt, grandfather, grandmother, first cousin, etc. This
means that you cannot use funds given to you by people who are really not family
members, for example your friends or colleagues, however you may be able to use
funds from a non-family third party if you can provide documentation of a very
close and long lasting relationship. This is done primarily to prevent people
from taking out personal loans which will have to be repaid to come up with
their down payment, which have the potential to throw off the person’s debt to
income ratio, or DTI. Basically, they don’t want you to take on more debt than
they believe you can safely repay, otherwise they would have qualified you for
100% financing.
If you find yourself in a situation where you need to get money from your folks
or other family to make a down payment on your new house, you will be required
to prove that you did not borrow the money from them with an expectation on
their part that it be repaid or with an intention on your part to repay it. In
fact, both you and your family will need to prove to your lender that the money
was given to you, in the form of a Gift. To verify that the funds are in fact
given freely, your lender will require special documentation.
If you are applying for a new mortgage, you should receive as part of your loan
application package a special form called a “Gift Letter”. The goal of this
letter is to identify the source of the funds and assure the lender that they
are in fact a gift. Typically, a gift letter will include the name of donor, the
name of the recipient, the relationship between the two parties, the amount of
the gift, the address of the property for which the gift is to be used to pay
for, the fact that no repayment is required or expected, and an assurance that
the person making the gift or the source of funds is not in nay way party or
beneficiary to the transaction, e.g. not the broker, seller, agent, loan
officer, builder and so on. In most cases the person giving the gift will be
required to document where the money came from, such as a bank account or a
brokerage account. If you are depositing the funds directly into escrow, or even
if they are going into your bank account, take some precautions to document the
transfer by keeping copies of the checks or deposit tickets/receipts from the
bank/escrow agent.
About the Author:
Tristan Hunt is a seasoned financial professional with a wealth of experience in
the mortgage industry, advising clients on debt consolidation, refinancing &
investor loans. Website: http://www.RefinanceOne.net
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