What Are The Rules In Using Gift Funds In Mortgage Transactions

This BLOG On What Are The Rules In Using Gift Funds In Mortgage Transactions Was UPDATED On January 9th, 2018

Home Buyers who want to qualify FHA loans will need a 3.5% down payment. Besides the down payment on a home purchase, there are closing costs on all home purchase and/or refinance mortgage transactions.

  • Borrowers need to show that they have 3.5% down payment in bank account
  • All funds in any mortgage transactions needs to be sourced
  • By being sourced, it means that either those funds needs to be seasoned in bank account for at least 60 days or if not, any large or irregular deposits made to account needs to be sourced
  • For example, if a borrower made a $5,000 large deposit in their bank account from a sale of a vehicle in the past 60 days and need to use that $5,000 towards the down payment or closing costs of the home purchase, borrower needs to provide lender with the following:
    • Copy of bill of sale
    • Copy of the check
    • Copy of the deposit slip along with the title of the vehicle
  • Those who cannot provide any documentation and just made the $5,000 irregular large deposit with cash, those funds cannot be sourced and cannot be used as the down payment or closing costs in a mortgage transaction
  • Any irregular deposits of $200 and larger needs to be sourced if borrower wants to use it towards seasoned funds towards down payment on home purchase
  • Folks who have mattress money ( cash ) in safe or safe deposit box, I strongly recommend that they make that cash deposit in a bank account as soon as possible
  • Let that cash season in  bank account for at least 60 days if they need to use that for down payment and/or closing costs

FHA Allows Using Gift Funds In Mortgage Transactions From Family Members

FHA allows home buyers  Using Gift Funds In Mortgage Transactions. 100% gift funds from a family member and/or relative to be used towards their down payment on their home purchase.

  • However, a gift letter needs to be signed by the donor stating that the gift funds are only a gift and not a loan and the gift funds will not be paid back after closing
  • The gift funds donor also needs to provide 30 days of bank statements showing that the gift funds has been seasoned in the donor’s account for the past 30 days
  • If the donor’s account had a large irregular cash deposit of the gift amount in the past 30 days and that deposit cannot be sourced, the gift funds cannot be used
  • A copy of the canceled check needs to be provided by the gift recipient and the bank statements from both parties needs to be provided: gift funds leaving the donor’s account into the recipient’s bank account
  • If the gift funds was a wire transfer, then supporting documents of the wire transfer needs to be provided

Automated Underwriting System ( AUS )

Automated Underwriting Systems do not view gifted funds favorably.

  • Automated Underwriting Systems like the mortgage loan applicant to have their own funds and not gift funds
  • A borrower showing that they have their own down payment shows more strength than those who receive gift funds for down payment
  • A mortgage loan applicant may get an approve/eligible per DU FINDINGS or LP FINDINGS with having their own funds for the down payment 
  • However, it loan officer enters the down payment source as gift funds, borrowers may get a refer/eligible per DU FINDINGS or LP FINDINGS
  • This is a problem with mortgage loan applicants with low credit scores and high debt to income ratios
  • They get an approve/eligible per DU FINDINGS on the initial mortgage application process and towards the end of the mortgage loan approval process they are short of funds to close and need to get gift funds
  • Mortgage lenders re-run automated underwriting system findings throughout the mortgage approval process when there are change of circumstances
  • If a mortgage loan applicant gets a referred/eligible per automated findings, then the file needs to be manually underwritten
  • The mortgage lender needs to play around with the AUS to get an approve/eligible per automated findings in order for the mortgage approval process to proceed

Case Scenarios Where Gift Donor Doesn’t Want To Provide Bank Statements

There are case scenarios where family members or relatives want to help the home buyer with the down payment by providing gift funds but are adamant that they do not want to provide their bank statements due to privacy issues

  • This is very common, unfortunately, if the donor of the gift funds does not provide the 30 days of the donor’s bank statement, the gift funds is of no use
  • Mortgage guidelines require that the donor’s gift funds needs to be seasoned in the donor’s bank account for at least 30 days and the only way of proving that is by providing 30 days of bank statements

Using Gift Funds In Mortgage Transactions: Closing Costs On Home Purchase

On every home purchase, there are closing costs the home buyer is responsible for.

  • Closing costs includes the following:
    • Tax stamps
    • Transfer stamps
    • Title charges
    • Attorneys fees
    • Appraisal fees
    • Pre-paids which are escrows
    • One year homeowners insurance
    • Food insurance, etc

Sellers Concessions And Lender Credit For Closing Costs

Using Gift Funds In Mortgage Transactions can be used for down payment on home purchase. However, sellers concessions and lender credit can only be used for closing costs and cannot be used for down payment.Using Gift Funds In Mortgage Transactions cannot be used for reserves either. There are times when Automated Underwriting System (AUS) will require reserves.

  • Home buyers who barely have enough funds for the down payment can get their closing costs covered by requesting a sellers concession towards a home buyers closing costs
  • FHA allows up to a maximum of 6% sellers concessions from the home seller to cover the home buyer’s closing costs
  • Conventional loan programs allow up to 3% sellers concessions on primary and second homes
  • 2% for investment properties
  • USDA loan programs allow up to 6% sellers concessions
  • VA loans allow a maximum of 4% sellers concession towards a home buyer’s closing costs
  • Most jumbo mortgage loan programs allow up to 3% sellers concessions
  • Home buyers cannot have a sellers concession overage
  • If there is a sellers concession overage, then the sellers concession overage needs to go back to the home seller
  • The home seller cannot give a sellers concession kick back to the home buyer

Overages in sellers concessions can be used to buy down the mortgage rates.

Home Buyers who need to qualify with a direct lender with no mortgage lender overlays can contact The Gustan Cho Team at USA Mortgage at 262-716-8151 or email us at gcho@usa-mortgage.com. We are available 7 days a week, evenings, weekends, and holidays.

Related> Gift funds versus own seasoned funds

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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