The cold, hard truth about mortgages and gifts

As a mortgage lender, I often work with recently engaged and married couples who plan to buy their first home.

The decision to buy comes with a lot of questions about the down payment, closing costs and the mortgage process in general. But then I also hear another common theme: what cash gifts am I allowed to receive?

Great question. There are several answers.

Here are the most common questions I receive.

Instead of my parents giving us money for our wedding, can they contribute to our down payment?

Yes, but the lender needs some documentation.

The borrower and donor must complete and sign a form called a “gift letter,” which specifies the date and amount given, as well as the relationship between the borrower and the donor. The letter also contains a statement that the funds are a gift and no repayment is required or expected.

The lender will also want to document that the gift did not put the donor in any financial harm. That’s why you may also be required to provide a copy of the donor’s withdrawal slip and/or bank statement and the borrower’s deposit slip and/or bank statement.

I received cash/checks from my recent wedding. Can I use the funds for my down payment?

Yes, most loan programs will accept wedding money as a source of funds. You will need to provide some documentation, but you won’t have to obtain gift letters from each person.

The home buyer needs to provide a copy of the marriage certificate/license and a signed statement that the funds were wedding gifts and repayment is not expected. Also, the buyer must produce copies of the check and the date of the deposits must be consistent with the wedding date.

Can parents sell their house to their children for a minimal amount?

If parents sell their home straight out to their children at a reduced price, it can impact the marketability of other homes in the neighborhood and their appraised value. That’s why parents may consider providing a gift of equity, the amount the seller (ex: parents) has in equity transferred as a credit to the homebuyer.

Here’s another piece of information many homebuyers don’t know, but should.

Did you know all down payments must be properly verified?

If the funds come from your bank account, a lender needs to make sure you have the money through bank statements.

If the funds are proceeds from the sale of a property, a lender will need a copy of the settlement statement that shows the transaction.

And if the money comes from a retirement fund, you need to provide the terms and conditions for borrowing against the retirement funds so the lender can verify if any repayment is required.

Yes, gifts are allowed and a big part of homebuying – especially for millennials. The key is to know the rules and follow them closely.