As the banking world has changed dramatically over the last 6 years, certain processes have become far more difficult than they were in the past. Appraisals, underwriting, review appraisers, flood certifications, good funds regulations and other various documentations have added mountains of paperwork and days (or weeks) to the home loan experience. But one formerly simple practice, that of getting a gift letter, may be the most convoluted process of the bunch now.
In years past, buyers who were purchasing with an FHA mortgage or even a conventional mortgage were allowed to get a “gift letter” from relatives for all or part of the down payment. The process use to require the “giver” to sign a “gift letter” form, then give the money to the buyer who had to deposit the money in their account, and get a copy of the deposit ticket that showed the deposited funds matched the “gift letter amount”. It was assumed that if the donor gave the money to the buyer, they must have had the money to give. All common sense in this process has now changed apparently.
In a recent transaction where the buyer was putting down 15% and needed to get 5% from a relative to secure an 80% loan, the process required the following:
1) Gift Letter filled out by donor. 2) Donor getting the money wired from their bank account to the buyer’s bank account. 3) Donor writing a letter saying the money they transferred to the buyer was theirs to give. 4)Donor’s bank signing a letter saying the donor had the money in their account to wire the amount they transferred. 5)Copy of the wire transfer document showing the money was transferred from the donor’s account to the buyer’s account. 6) Buyer’s bank confirming the funds were successfully transferred into the buyer’s bank account. 7) Buyer’s bank giving a new bank statement showing the new balance in the buyer’s account after the transfer. 8 ) Mortgage company calling the donor to confirm the gift was really a gift and not a side loan. This phone call includes grilling the donor with multiple questions to see if they can be tricked into admitting it is truly a loan and not really a gift which would disqualify the buyer from getting the loan. 9) Assuming all those steps go ok, the money then needs wired from the buyer’s account to the closing institution for closing.
Is it possible to get through all these steps without hitting a land mine? Sure. And chances are most “gift letters” will be successfully completed to help the buyer obtain their loan. But the process can take weeks. Especially if the donor has to pull money from a retirement account or stock sale and needs time to provide documentation of where that money is coming from. So if you are thinking of buying a home and may need a gift letter it is wise to get all the steps in writing from your lender early in the game. If you just go get a check from a relative and deposit it in your account to secure the funds needed to buy the home and you don’t follow the exact steps required then you will not be able to use that money for the purchase. Large sums of money just appearing in your account without exact documentation are a red flag to lenders that some illegal activity may be going on and the loan will not close.
When it comes to “gift letters” you are guilty until proven innocent so make sure you follow all the steps necessary for your lender to approve your “gift letter” and give you the green light to secure the home of your dreams.