The Right Way To Document A Cash Gift For Downpayment

How to accept a cash gift on a mortgageAs lenders tighten mortgage guidelines for home buyers in the Inland Empire region of California, minimum downpayment requirements are increasing.  Several years ago, you could finance a home with nothing down. Today, most conventional mortgages require at least 10 percent (or 5% down with minimum 680 FICO score).

Anecdotally, guideline changes have led to an increase in the number of home buyers accepting cash gifts from family.

Gifts are allowed in most cases but the problem is, if you don’t accept the gift in a “lender-friendly” way, the mortgage underwriter could reject it, and negate it.

You can’t just deposit a cash gift into your bank account. You have to follow a series of steps and keep records.

  1. Provide an acceptable gift letter signed by all parties
  2. Provide documentation of the gifter’s withdrawal of funds via teller receipts & bank statements
  3. Provide documentation of the giftee’s deposit of funds via teller receipts & bank statements

Lenders require these 3 steps for two basic reasons.  First, they want to make sure that the cash gift is “clean” (i.e. not laundered).  Second, they want to make sure the gift is really a gift and not a loan-in-disguise.

It’s why lenders typically require that the loan application be accompanied by a signed, dated letter.

For example:

I am the [relationship to recipient] of [name of recipient] and this letter serves as evidence that I am gifting [name of recipient] [amount of gift] to be used for the purchase of the home at [complete address of property].

This is a gift — not a loan — and there is no expectation of repayment.

Signed,
[Signature of gifter]

As an additional step, home buyers receiving cash gifts should make sure that gifted funds are not commingled at the time of deposit. If the cash gift is for $10,000, therefore, the bank’s deposit slip should indicate that a $10,000 deposit was made — nothing more, nothing less. Don’t add a random $100 deposit to the transaction, in other words. The $100 deposit should be a separate transaction.

It’s also worth noting that gifting funds between family members can create both legal and tax liabilities.  If you’re unsure about how donating or receiving a gift may impact you, call or email me directly.  If I can’t help you with your questions, I can refer you to somebody that can.

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