You’re ready to buy a house. You either have or will soon have the income to handle the monthly payments. But you’re lacking the funds needed for the downpayment and closing costs.
Your parents offer to give you some cash to help with the downpayment. You can easily pay them back at some point. You’re thinking that will ensure you can qualify for a mortgage.
But it may not be that easy. Depending on the type of mortgage you apply for, your lender will scrutinize cash gifts you plan to use for:
- Closing costs.
- Loan reserves.
Although using a gift won’t necessarily disqualify you from getting a mortgage loan, it may complicate the process.
Here are some things you need to know if you will depend on a cash gift to qualify for a mortgage.
One way for doctors to avoid the hassle of using gifts for downpayment is to apply for a physician mortgage loan.
Banks offering this type of financing take the approach that a doctor’s income potential enables them to offer relaxed underwriting guidelines and waive some of the requirements of conventional loans.
Many physician mortgage lenders will offer 100 percent financing, meaning you wouldn’t have to worry about having a downpayment. Some that do require downpayments often enable physician borrowers to use gift money.
Another option is to obtain a Federal Housing Administration (FHA) mortgage or a loan through Veteran Affairs (VA). These mortgages are insured by these agencies, enabling lenders to loosen lending requirements.
FHA loans typically only require a 3.5 percent downpayment. A financial gift from a family member, employer or charitable organization can account for up to 100 percent of your downpayment, provided the borrower meets a minimum credit score.
Conventional mortgage loans will sometimes enable you to use gifts for your entire downpayment if it accounts for 20 percent of the purchase price. Otherwise, the lender may require that at least 5 percent of the purchase price be your own funds, and not a gift.
When you apply for a mortgage, you will need to provide tax returns as well as recent bank statements, typically the 60 days prior to application.
Lenders will immediately scrutinize any non-payroll deposits, such as gifts, in your bank accounts. If you are counting on that money to fulfill a downpayment requirement, you may not be able to (though you may be able to use it for closing costs).
There are several reasons why you can’t automatically use a cash gift to qualify for a mortgage. Regulators require that lenders know the source for all funds used to buy a home to prevent fraud.
Lenders also have to protect their interests. If a downpayment comes from a credit card advance, payday loan company, or a loan from a retirement account, that means the borrower is incurring debt just to make the downpayment. This would impact the borrower’s ability to repay the mortgage.
If you receive a gift from your parents or other family member, you will need to show the lender that it’s an actual gift and that it came from the family member. The gift giver may need to provide bank statements to prove they were the source of the gift.
Lenders will also typically require a “gift letter” from the giver. This document informs the lender of the who the donor is, the relationship between donor and borrower, and the amount given.
Just as important, the donor must confirm in the letter that they don’t expect repayment and they don’t have any interest in the sale of the property (e.g., they’re not the seller or one of the real estate agents involved in the transaction).
It’s possible to use a cash gift without the scrutiny, but you will need to plan months in advance. Since most lenders only look at 60 days of bank statements, any cash gifts deposited prior to 60 days will be considered “seasoned.”
If for whatever reason you can’t plan ahead, then it’s a good idea to check with your lender first before you deposit a cash gift into your bank account. That way you can be sure you meet the lender’s requirements and get through the process.
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Joel Palmer is a writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.