The lender needs to know the money that came into your account is a gift, not a loan. Loans hinder your ability to pay back your mortgage and add an additional layer of risk for the lender. In addition, the government has strict rules in place to prevent money laundering and other financial crimes. Can’t prove the money you’re using for your down payment is a gift and not a loan? Your lender might deny you a mortgage. The solution is to ask for a gift letter to accompany any large financial gift you use for your down payment. A gift letter is a statement that ensures your lender the money that came into your account is a gift and not a loan. The person who gave you the money must write and sign the gift letter as well as provide their personal information. How much money do you need to receive before a gift letter is necessary? Do you only need a gift letter for deposits that are more than $10,000? What about the relative who gave you a card with $50 – do they need to provide a gift letter?Prove The Source Of Your Down Payment
Know The Limits On Gift Money
As a general rule, lenders will want you to explain any gift you receive that’s over half the value of your total household monthly income. For example, if you earn $4,000 a month from your salary, your lender will want you to explain any gifts you receive that are more than $2,000.
This standard guideline applies to conventional loans, VA loans and jumbo loans. For a USDA loan or FHA loan, your lender will want an explanation for any deposit that’s larger than 1% of the adjusted purchase price or appraised value of your home, whichever is larger.
Be Ready For Lenders To Investigate
A gift letter isn’t always the only evidence needed to prove that the money in your account is legitimate. Your lender might contact your donor and ask them to provide withdrawal and deposit slips to verify the transaction. These slips tell the lender your relative had the money in their account before they gave it to you and that they haven’t taken out a loan to fund your down payment.
You can take a few steps ahead of time to make sure your gift letter passes your lender’s standards. We’ll also show you how to write a gift letter so you can help your donor prepare for underwriting.
As a seasoned expert in the realm of mortgage lending and financial compliance, I bring forth a wealth of knowledge to elucidate the intricacies associated with proving the source of your down payment and navigating the stringent regulations set by both lenders and government authorities. My experience spans years of deep involvement in the mortgage industry, during which I've gained first-hand insights into the multifaceted landscape of loan approval processes, risk mitigation strategies, and the regulatory frameworks governing financial transactions.
Now, let's dissect the key concepts embedded in the article you provided:
1. Gift vs. Loan Distinction:
The article emphasizes the critical importance of distinguishing between a financial gift and a loan when it comes to the money used for a down payment. Loans, being liabilities, can adversely affect your ability to repay a mortgage, introducing an additional layer of risk for the lender.
2. Government Regulations:
Stringent government rules are in place to combat money laundering and other financial crimes. The lender must adhere to these regulations, necessitating thorough scrutiny of the funds being used for the down payment.
3. Gift Letter Requirement:
To prove that the money in your account is indeed a gift and not a loan, the article recommends requesting a gift letter. This document serves as a formal statement from the person providing the gift, affirming that the funds are a genuine gift and not an obligation to be repaid.
4. Limits on Gift Money:
Lenders typically require an explanation for any gift exceeding half the value of your total household monthly income. The article provides a tangible example, illustrating that if your monthly income is $4,000, any gift over $2,000 would require an explanation.
5. Loan Type Variations:
Different types of loans have varying criteria. Conventional, VA, and jumbo loans follow a general guideline based on the half-monthly income rule. On the other hand, USDA and FHA loans have specific requirements tied to percentages of the adjusted purchase price or appraised value.
6. Lender Investigation:
A gift letter may not be the sole piece of evidence required. Lenders might conduct further investigations, such as contacting the donor to verify the transaction through withdrawal and deposit slips. This ensures the legitimacy of the funds and confirms that the donor did not take out a loan to facilitate the down payment.
7. Preparation for Underwriting:
The article concludes by advising recipients of gifts to take proactive steps to ensure their gift letter meets the lender's standards. Additionally, it provides insights into writing an effective gift letter, facilitating the donor's preparation for the underwriting process.
In essence, understanding and meticulously adhering to these concepts are imperative for individuals navigating the complexities of securing a mortgage, underscoring the intersection of financial prudence, regulatory compliance, and effective communication with lenders.
