FHA allows down payments and closing costs on a home purchase to be 100% gifted by a family member and/or relative. There are strict FHA guidelines regarding gift funds versus own seasoned funds. A gift letter is required stating that the gift funds are gift only and by no means a loan to the recipient of the gift and that the gift funds will not be paid back to the donor after the home closing.
Gift Funds Needs To Be Seasoned
For mortgage lender to be able to use gift funds as the source of the down payment and/or closing costs, the donor needs to sign a gift letter stating that the gift is not a loan and that the gift funds will not be paid back after the closing of the mortgage loan. In addition, the donor needs to provide a 30 day bank statement showing that the gift funds has been seasoned for at least 30 days in the borrower’s bank account. The gift funds leaving the donor’s account and going into the recipients bank account needs to be provided and this is normally done by providing the copy of the check and deposit slip being deposited into the recipients bank account. The funds leaving the donor’s bank account is reflected from the donor’s bank account. Wire transfers are acceptable as long as it is reflected in both bank statements. If the gift funds was not seasoned and a big deposit was made in the past 30 days of the donor’s bank account, then the source of the large deposit needs to be provided. A recent example where I ran into this situation is where a donor had a recent large deposit in the past 30 days from the sale of the home and the donor was gifting $15,000 to a relative for a down payment of his home. In this case scenario, the donor needed to provide the copy of the HUD settlement statement from the sale of her home and the proceeds check being deposited into her account.
Own Funds Versus Gift Funds
Why not just deposit the gift funds into the recipient’s bank account and forget saying it is a gift? The reason being is that mortgage lenders require 60 days bank statements from the mortgage loan applicant whereas they only require 30 days bank statements from the donor of gift funds. Any large deposit on a mortgage loan applicant’s bank statements in the past 60 days will need to be sourced. If there is a large deposit from a family member gift funds, it will be questioned and sourced. If you do not want any questions asked on large or irregular bank deposits, you need to have those large deposits and irregular deposits seasoned in your bank account for at least 60 days. Some folks have mattress money, cash money in a home safe or safe deposit box in a bank, and unfortunately, cash money is not recognized in the mortgage industry. If you have cash money and need to use it towards your down payment and/or closing costs, then you need to deposit the cash in your bank account and let it season for at least 60 days.
Gift funds only needs to be seasoned for 30 days. If a donor has cash money and wants to give a gift to a relative or family member for a home purchase, the donor needs to have it deposited in his or her bank account and let it season for at least sixty days if the funds cannot be sourced.
There are cases where mortgage lenders will require three to six months reserves from a mortgage loan applicant. Reserves are one month of principal, interest, taxes, and insurance payment. Cases where mortgage lenders require reserves is on cases where the mortgage loan applicant has credit scores under 600 FICO, manual underwriting mortgage applicants, and higher debt to income ratios mortgage loan applicants. Gift funds cannot be used for reserves. Reserves can only be the mortgage loan borrower’s own funds. Retirement funds such as IRAs and 401k investment programs can be used for reserves.
Automated Underwriting System
Fannie Mae’s Automated Underwriting System is the automated approval system most mortgage lenders go off by. Every mortgage loan application as well as the mortgage loan applicant’s credit report is submitted to the Automated Underwriting System for an automated approval. Gift Funds are listed on the mortgage loan application as gift funds and the Automated Underwriting System will recognize it as such. Fannie Mae and Freddie Mac does not view gift funds favorably. Gift funds does not show strength on the mortgage loan applicant, however, gift funds are allowed. There are cases where gift funds are not allowed and it will be stated on the DU FINDINGS of the automated approval.
Cases Where Gift Funds Are Not Allowed
As discussed earlier, gift funds cannot be used for reserves if a mortgage lender is requiring reserves from the mortgage loan borrowers. Many times, the automated approval findings will state that gift funds are not allowed on cases where the mortgage loan applicant has lower credit scores, higher debt to income ratios, recent late payments, multiple collection accounts with credit balance, little assets, short term on the job, poor credit history. It will specifically state on the automated approval findings that no gift funds are allowed. Cases where no gift funds are allowed, the donor should gift the recipient the down payment money and the recipient should let the gift funds season for sixty days where it will no longer be gift funds and will be the mortgage loan applicant’s own funds.