Many first-time homebuyers who do not have the funds available for a down payment receive a gifted sum of money from family members to be used toward their home purchase. Though gift funds often enable many homebuyers to make their first purchase, the process of documenting that gift goes past simply depositing that money into your bank account.
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The mortgage industry places a great deal of emphasis on properly documenting who and where those gift funds came from to avoid fraudulent situations. Many first-time homebuyers ask, "The money is in my account, why does it matter?" It matters because one of the major frauds in the "old days" was when a seller actually provided cash to borrowers disguised as a gift from family.
The mortgage underwriting process determines from your credit score, income, assets, etc. how risky it would be to lend you money. When underwriters verify funds in your bank account, they want to make sure the money sitting in there is actually your money and not a personal loan from a family member or friend to be paid back. This ensures that your debt-to-income ratio is accurate and you can indeed afford your mortgage payment.
To deter fraudulent actions as mentioned, lenders require a paper trail of your gift funds. While you will need to provide your lender with bank statements regardless of gift funds, if Mom and Dad give you $10,000 for your home purchase, you and your parents will need to provide a gift letter with (but not limited to) the following information:
- Name, address, phone number and relationship of the donor
- The dollar amount of the gift
- Proof the donor has the ability to provide the gift (i.e. copy of full bank statement with the donor's name on it)
- Evidence of the transfer (i.e. copy of the deposited check, wire confirmation, transfer from two accounts within the same financial institution, etc.)
- Date the funds were transferred
- A statement from the donor that no repayment is expected
- The donor's signature
- Evidence funds were deposited and available in your account
If you have additional questions about gift funds and the loan process, contact one of our mortgage bankers. For more information about buying your first home, download our free Mortgage 101 Handbook for a go-to guide on everything about homebuying and home financing.