Gift Funds Versus Own Seasoned Funds For Down Payment
This Article Is About Gift Funds Versus Own Seasoned Funds For Down Payment
HUD 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. Gift Funds Versus Own Seasoned Funds are not viewed favorably. Lenders and the automated underwriting system do not view gift funds favorably. Gift Funds Versus Own Seasoned Funds may not be allowed for borrowers who have under 600 credit scores.
A gift letter is required from borrowers using gift funds. The gift letter, provided by the lender, needs to state gift funds are a gift only. The gift letter will state the recipient of the gift is getting a gift and not a loan. Gift funds will not be paid back to the donor after the home closing.
Gift Funds Versus Own Seasoned Funds On Seasoning Requirements
For a lender to be able to use gift funds versus own seasoned funds as the source of the down payment and/or closing costs, the donor needs to sign a gift letter. 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 needs to be signed and dated by the donor. In addition, the donor needs to provide a 30-day bank statement. The bank statement showing that the gift funds have been seasoned for at least 30 days in the borrower’s bank account needs to be provided by the donor. The gift funds leaving the donor’s account and going into the recipient’s bank account needs to be provided. This is normally done by providing a copy of the check and deposit slip being deposited into the recipient’s bank account.
The funds leaving the donor’s bank account are 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 were 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 by the donor.
A recent example where I ran into this situation is the following:
- the donor had a recent large deposit in the past 30 days from the sale of the home
- 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 a copy of the HUD settlement statement from the sale of her home and the proceeds check being deposited into her account.
Gift Funds Versus Own Seasoned Funds Guidelines
Why not just deposit the gift funds into the recipient’s bank account and forget to say it is a gift?
The reason being is that lenders require 60 days bank statements from borrowers. They only require 30 days bank statements from the donor of gift funds. Any large deposit on an applicant’s bank statements in the past 60 days will need to be sourced. If there is a large deposit from a family member’s gift funds, it will be questioned and sourced.
If borrowers do not want to be asked about large or irregular bank deposits, they need to have those large deposits and irregular deposits seasoned in a bank account for at least 60 days. Some folks have mattress money, cash money in a home safe, or a safe deposit box in a bank. Unfortunately, cash money is not recognized in the mortgage industry. Home Buyers with cash money to use it towards a down payment and/or closing costs, then need to deposit the cash in the bank account and let it season for at least 60 days.
Seasoning Of Gift Funds
Gift funds only need 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 there are guidelines. The donor needs to have it deposited in his or her bank account. Donors need to let it season for at least sixty days if the funds cannot be sourced.
There are cases where gift funds are not allowed and AUS will condition it is not allowed. It will be stated on the DU FINDINGS of the automated approval.
Cases, where gift funds are conditioned that is not allowed by AUS, are on the following cases:
- Under 600 credit scores on government loans
- Outstanding collections and charged-off accounts
- High debt to income ratios
- Multiple non-occupant co-borrowers
- Limited to no active credit tradelines
Reserves Guidelines On Gift Funds Versus Own Seasoned Funds
There are cases where lenders will require reserves from a mortgage loan applicant. Reserves are one month of principal, interest, taxes, and insurance payment.
Cases, where lenders require reserves, are the following cases:
- the mortgage loan applicant has credit scores under 600
- manual underwriting mortgage applicants
- 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 automated approval. Gift Funds are listed on the mortgage loan application as gift funds. The Automated Underwriting System will recognize it as such. Fannie Mae and Freddie Mac do not view gift funds favorably. Gift funds do not show strength on the mortgage loan applicant. However, gift funds are allowed.
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 a 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. In 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.