Refinance & Mortgage Tips: Down Payment With Gift Letter
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
Tristan Hunt
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