Learn how to properly document gifted money for a down payment on a new home.
Let’s say a relative give you a nice chunk of money as a gift that will be used for a down payment on a new home. Sounds great, right? While a down payment on a home makes for a far more interesting gift than say, an air fryer, using that money for its intended use isn’t as black and white as you would hope.
The Underwriting Process
To understand why gift money matters in regards to purchasing a home, we have to first understand underwriting. Underwriting is when your lender looks over your credit score, income, and assets to determine if you’re a risk.
Your lender wants to ensure that you’re financially able to pay back the loan. This is why they look at your income and credit history, two strong indicators of how responsible you are with your finances. If a relative gives you a one-time gift of $20,000, for example, the bank cannot assume that you’re going to have access to that type of money on a regular basis. Therefore, they cannot count it as part of your income.
Gift vs. Loan
If a sizable amount of money was given to you from a friend or relative, the bank has no means of knowing whether or not that money was an actual gift or a loan. The distinctive question that must be answered is, “Will this sum of money have to be repaid?”
If the money was indeed intended to be a gift, then the donor must write a gift letter to your mortgage company that clarifies the intent of the gift. The gift letter includes the donor’s name and contact information, their relationship to the client, the amount gifted, the date the amount was transferred to the applicant, and a statement that no repayment is expected.
The Bottom Line
Even after your friend or relative has submitted a gift letter, the lender may still determine that you’re not qualified for the loan and ask for additional documentation, such as bank statements or tax returns. However, if you and your donor are prepared going into the process, then your lender will have everything they need to make an informed decision.