What You Need To Know About Gift Funds

It’s no secret that the cost of real estate in San Francisco is high. Many first-time home buyers are turning to family—specifically, to their parents—for a little extra help. If you’re considering making a purchase that will partially rely on what are called “gift funds,” here’s what you need to know, courtesy of my colleague Gordon Friedman of Mortgage Service Professionals:

- The funds must be for a primary residence or second home (not for an investment property)
- The gift must be from a parent, relative, domestic partner, spouse or fiance
- A gift letter is required, which must state the gift amount, property address, date given/to be given, and donor address. The letter also must state that no repayment will be required
- Buyer must have 20% or more in down payment, though the entire down payment can be a gift
- If the buyer has less than 20% down, there will be a 5% borrower contribution required
- For a jumbo loan (more than $625,500), a 5% borrower contribution is required regardless of the down payment.

Parents may co-sign to help their child qualify for financing. Their role in the transaction is as a “non-occupant co-borrower.” They will be on the loan and title, but will not live in the property. Here are the ground rules:
- Parents’ income is combined with son or daughter (and spouse if married) for qualification
- Parents’ debts must be considered
- A loan will only be available from lenders that underwrite to Freddie Mac conforming loan guidelines (not Fannie Mae)
- There’s limited availability among jumbo lenders
- Parents’ contribution towards down payment is not a gift since they will be on the loan

If you’ll be using gift money in your purchase, it’s important to let your lender know during the preapproval stage so there are no surprises.

Lender Trends See Buyers Scratching Heads

The real estate lending landscape has changed significantly in the past couple years. Lenders are girding themselves against fraud in many ways, and that trickles down to what sort of documentation they’ll request from buyers in transactions.

Two areas that have raised questions recently center around gift money and personal information requests. Our team at Guarantee Mortgage recently presented an explanation about the issues related to these topics, so I thought I’d share this very practical information with you.

Many buyers today are receiving gift money to help pay for their purchase. This used to be a lot simpler. But now, lenders are requiring a gift letter, copy of the gift check or transfer, proof of deposit and source. Yes, this is a bit excessive. But the reason it’s being done is because the lender wants to make sure that the borrower is not “borrowing” the money and laundering it through a relative, according to Guarantee Mortgage. A lender is making a loan based on certain assumptions, which include the borrower’s existing debt. Additional debt will skew the debt ratios and may possibly disqualify the borrower from the loan. Lenders will also want to see the funds sitting in the relative’s account, followed by a step-by-step paper trail of the transfer.

Keep it in mind if you’re gearing up for a purchase with gift money involved.

Another recent development is a request from the “shorting lender” (the one on the seller side) to obtain the first five digits of the buyer’s social security number, along with his or her birth date and phone number. Sounds strange. But Guarantee Mortgage says that so far, only Bank of America is requesting this information in transactions with big losses for the institution. The lender asks for this info in order to verify that there’s no fraud in the sale (for example, that the buyer and seller are not related). The lender doesn’t run a credit report on the buyer, but enters the info in its systems and runs some algorithms in order to see if there are any connections that come up (i.e., shared property ownership, co-signers, etc).

So there you have it—wacky lender activity debunked. I’ll keep you posted as more trends pop up that beg for rationale.