Sometimes when you are underwriting the same question seems to come in “three’s”. Maybe it is timing, maybe happenstance, or maybe different people are asking the same question about the same loan. A few weeks back I was helping out a loan officer to get a conventional loan ready to close, but the borrower ended up short funds to close due to a sales price change on the subject property. One option the borrower had to make up the assets needed was to get gift funds from her husband who was not on the loan. After the LO talked to the borrower he let me know that her husband owned a business and he would get the gift letter from the husband for $5,000 and he would just write a check for his business account to “save time” on the transfer of funds.
How to use gift money for a down payment
I let the loan officer know that yes the borrowers husband could give a gift, but the money had to come from him and not the business. He responded back stating that the guidelines seem to say as long as the money comes from the donor it is ok, and if the donor owns 100% of the business it is the same as the donor giving the gift. To be honest I had not looked up gift guidelines in a few months, so I wanted to double check my response and make sure I had the right answer, here is what the guidelines state:
A borrower of a mortgage loan secured by a principal residence or second home may use funds received as a personal gift from an acceptable donor. Gift funds may fund all or part of the down payment, closing costs, or financial reserves subject to the minimum borrower contribution requirements below. Gifts are not allowed on an investment property
A gift can be provided by:
*a relative, defined as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship; or
*a fiancé, fiancée, or domestic partner.
On the statement above you can see where the guidelines state the gift must come from personal funds and not a check from the business. This is also confirmed under FNMA’s Top Trending Questions
Are gift funds allowed from a donor’s business?
Yes, as long as the check and gift letter are from an acceptable donor and not from the business.
(Ref: Selling Guide: B3-4.3-04 Personal Gifts)
The good news is we were able to get the loan completed without too much hassle since we were able to confirm the proper way to document the gift from the donor. One of the big differences between the conventional loan products and the government loan product, in regards to gift funds, is a lack of requirement to source the donor’s ability to supply the gift. Bottom line on this rule is the source of the funds is not as big of an issue as making sure the funds are from the donor NOT the business.
Key attributes of a gift letter
As a quick reminder don’t let your loans get “hung up” on a simple item as gift letter, here are the key points that must be on a gift letter.
The gift letter must contain a number of specific items to qualify for use to FNMA and FHLMC:
- Gift giver name and address
- Relationship to borrower
- Date and amount of gift, clearly stating that it is a gift, not a loan
- Address of the property being purchased
- Signature of the gift giver
As you can see the information required on the gift letter is more than just a brief note. If you were expecting to use funds obtained via wedding gifts the burden of proof is quite high. Additionally these rules differ between the different agencies as well as the mortgage company, so be careful.