I’m getting married in July, and we’re hoping to buy a house when our lease is up in September. We’ve spent a fair chunk of change on our wedding, but (fingers crossed!) we’re hoping to get at least some of the money back as wedding gifts, and some of our relatives have hinted that that’s what we’ll be getting. Don’t get me wrong: I’m pretty darn excited to get a toaster oven, nice dishes, stemware and all that, but I certainly won’t turn down money for a down payment.
You might think that you can just use whatever financial gifts your friends and family give you for your down payment, but using gift money is not as cut and dried as you might think. Whether you have $20 or $20,000, the source of the funds in your bank account will matter just as much as how much money you actually have. To understand why the source of your funds matters to your mortgage company, you’ll first need to understand what underwriting is and how it impacts your loan.
Underwriting refers to the process in which your lender looks at your credit score, income and assets to determine how risky it would be to lend you money. When underwriters look at your assets, they check to make sure that the money in your account is indeed YOUR money – that is, they want to make sure any large deposits in your account are gifts, not loans, from your friends and family. This is essential to ensuring that you can actually afford your mortgage payment and that you’ll be likely to pay the loan back. If you used a personal loan to qualify for a home loan, chances are you’d be left with a big financial mess once you had to start paying both loans back.
So how can an underwriter establish that deposits in your bank account are gifts and not loans? They’ll need the gift-giver to write a gift letter. Let’s take a look at what that means.
If you’re using gift money as part or all of your down payment, you’ll need the donor to write a gift letter to your mortgage company that makes it clear that the money is a gift and not a loan. Here’s what your gift letter should include:
- The donor’s name, address and phone number
- The donor’s relationship to the client
- The dollar amount of the gift
- The date the funds were transferred
- A statement from the donor that no repayment is expected
- The donor’s signature
- The address of the property being purchased
It’s important to understand that the gift letter in itself may not be enough evidence for the mortgage company. If you’re getting an FHA loan, the person who gives you the funds will be required to provide a bank statement in addition to a gift letter – so you’ll probably want to let your generous friend or relative know this upfront.
Gift Money and Your Loan Type
One thing to consider is that the amount of gift money you use in relation to how much of your own money you put down may impact what kind of loan you can get. Here are some rules about gift money as it relates to different types of loans.
- If you put down 20% or more, it can all be from a gift.
- If you put down less than 20%, part of the money can be a gift, but part must come from your own funds. This minimum contribution varies by loan type.
- You can only use gift money on primary residences and second homes.
FHA and VA
- All of your down payment can be gift money.
- If your credit score is between 580 and 619, at least 3.5% of your down payment must be your own money.
- You can only use gift money on primary residences.
Keep in mind that these rules are subject to change based on lending laws – so check with your mortgage company for up-to-date guidelines.
How the Timing and Amount of Gift Money Impacts Underwriting
After my wedding, I’ll (hopefully) have checks to deposit – but I don’t want these deposits to cause problems when I’m trying to qualify for a mortgage. I spoke with Lindsay Villasenor, a Quicken Loans divisional vice president, to get some further details on how gift money impacts underwriting.
According to Lindsay, Quicken Loans requires a 60-day history of assets for qualification purposes. As long as you have documentation for the past 60 days, your mortgage company can take it from there.
So within that 60-day period, which deposits do you have to worry about getting a gift letter for? Grab your wedding veil and jump into this hypothetical situation with me for a moment.
You just got married. Aunt Sue gave you a $75 check, but Grandma Betty gave you $10,000 for tying the knot (you’ve always suspected you were the favorite grandkid). Will you need gift letters for both deposits?
In general, your underwriter will need to verify the source of any large deposit. So what’s the criteria for “large deposit”? According to Lindsay, it’s “any single deposit that exceeds 50% of the total monthly qualifying income.” This is for conventional, VA and Jumbo loans. For FHA, the threshold is 25%. Let’s say you are doing a conventional loan for our example. If you make $4,000 a month, any deposit over $2,000 would probably be questioned by your underwriter. Therefore, the underwriter will probably want to verify that Grandma Betty’s $10,000 gift is a gift, not a loan, so you’ll need to ask her for a gift letter. Aunt Sue’s gift, however, is small enough that the underwriter might not question it.
Of course, this is partially up to the underwriter’s discretion. If there are any deposits that seem to be out of the ordinary, your underwriter may question them regardless of your income. Here’s an example that Lindsay gave: “If a client only maintains a $400 balance on a regular basis, but all of a sudden has a $5,000 deposit, even though that $5,000 may not be over 50% of the total income, it raises a red flag.” So we would dig deeper into that situation, just to make sure the situation checks out. So while your Aunt Sue’s small gift might not be questionable in itself, if the underwriter finds that it’s out of the ordinary, he or she may require gift documentation.
If you know that you’ll be getting any financial gift to help with your down payment, be prepared to document it for your mortgage company. Do you still have questions about using gift money for your down payment? Speak with a home loan expert today or comment below, and we’ll get you some answers!