If you don’t have money for a down payment, you probably think that you are out of luck and you have to rent. What if we told you that there is a way to get a mortgage even if you don’t have the money to put down on a home?
Most lenders and loan programs allow you to receive gift funds for a down payment. Now, there is a difference between gift funds and borrowing money. You cannot borrow money from a family member for the down payment. But, if a family member gives you the funds without the expectation of repayment, you can use them for your down payment.
The Difference Between Borrowing and a Gift
You might wonder why lenders would care how you get the money from a family member. Money is money, right? While that’s true, there’s one important factor that lenders look at – the debt that borrowing money causes.
Lenders have to calculate your debt ratio in order to qualify you for your loan. The debt ratio is a comparison of your outstanding debts to your income. They use the outstanding debts as they report on your credit report. They include debts like your credit card payments, installment loan payments, student loan payments, and car payments. They will also include your intended mortgage payments.
If you borrow money from a family member, the lender would have to include that debt in your debt ratio. If a family member gifted you the money, though, the lender would not have to include the debt in your debt ratio.
How to Prove that the Funds are a Gift
So how do you go about proving to a lender that the funds are a gift? There is a specific process you must follow.
First, be careful how you receive the funds. You have to document every step that you take here. Don’t receive the funds as cash. Instead, your relative should give them to you on a check. When you receive the check, make a photocopy of it. You must then deposit the check into the account that you will use for your down payment and closing costs. In other words, put it in the account that you already verified with the lender. If you choose another account, you will have to provide bank statements for this account too.
When you deposit the funds, keep the deposit ticket. Your lender will need this. You must deposit the entire check in the same bank account. remember to keep the copy of the check and the deposit ticket so that you can prove to the lender that the funds are from your relative and not a loan from elsewhere.
In the meantime, your relative will also have to provide proof of the origination of the funds they provide you. This is just a precaution so that the lender can make sure that the funds aren’t a loan that your relative took out for you. Typically providing the last two months of bank statements can satisfy the lender’s requirements as long as there aren’t any large deposits in their account within that time.
The Final Step
Even after all of those steps, the donor has one more thing to do. He/she must write a gift letter for you. This letter is further proof that the funds the family member provided you aren’t a loan.
The gift letter must include:
- The date
- The property address that the funds are of
- The donor’s name, address, and phone number
- The amount the donor gave you
- The relationship between you and the donor
- A sentence stating that the money is not a loan
Once you have all of this, the lender can verify that the funds you received are a gift and not a loan. If at any point the lender feels that the funds are a loan, it will change the dynamic of the loan causing the lender to go back to the drawing board.
The best thing you can do is follow the gift funds rule to the letter so that you don’t risk the chance of losing your approval.