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When I bought my house at the height of the bubble seven years ago, I remember having a conversation with a loan officer about the source of down payment money.

It was stated to me that if I was given the down payment for my house as a gift from my parents, that would have to wait several months because the bank wouldn't do the mortgage that way.

Why?

Can my rent to own equity be used as a downpayment? This question makes we wonder why the bank cares where my down payment comes from. Was I misled? There are other questions on this site that seem to indicate it is possible.

  • (I never got a large gift, so it was a moot question at the time) – MrChrister Jul 26 '12 at 21:48
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Banks worry that the large gift might be a loan that is ultimately expected to be repaid. If so, that affects the cash flow of the recipient, and makes it more difficult to make the mortgage payments to the bank.

In some cases, of course, it is an informal loan: Dad advances a large $X to son to use as a downpayent, but does not charge interest and the expectation is that the money will be returned in smaller chunks as and when the son can afford to repay Dad.

In some cases, Dad truly means it as a gift, but son feels an obligation to repay the money, if not explicitly, then by paying for the first few months of Dad's nursing home stay, etc. So, banks like to have an explicit document such as a copy of a letter from Dad saying that this money is a gift, and some assurance that this is on the up and up.

If the amount is larger than the maximum gift that can be given each year without having to file a gift tax return, then some assurance that a gift tax return will be filed is helpful. Mentioning this in the letter is good: it indicates that there are no secret handshakes or secret agreements to the effect that this is in fact a loan, with or without regular repayments.

  • @Warren Please do not make changes to my answer without understanding the situation fully. The donor of a gift is the person who might need to file a gift tax return: the recipient does not file a gift tax return and does not pay any kind of tax (not even income tax) on the gift amount either. – Dilip Sarwate Jul 28 '12 at 2:50
  • that is a change from the last time I received a gift (which might be a state issue and not a federal one) – warren Jul 28 '12 at 6:08
  • @warren Perhaps you would be kind enough to reveal the year of the gift and the state which required you, the recepient of the gift, to file a gift tax return? Many states mimic Federal rules when it comes to gift taxes and require gift tax returns to be filed by the donor but not by the recipient, of a gift. – Dilip Sarwate Jul 28 '12 at 19:10
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The gift issue, as explained to me by the mortgage officer at our credit union, is that they look at the average balance of your checking/savings accounts of the 3-6 months prior to mortgage issuance date.

They look at the average balance to make sure you are financially stable beyond what your income and credit score indicate.

An example with numbers:

  • $100k house
  • $10k down payment (10%)
  • $2500 current 3 month average balance of checking account
  • $11k current actual balance of checking account (includes $10k gift from dad last week)

With an average balance of $2500, the bank will (reasonably) presume you CANNOT make a $10k down payment.

Now, let's extend the date by 3 months:

  • $11,500 current average balance
  • $13k current actual balance

By not "using" the $10k gift-from-dad, you're showing the bank that you're more financially stable than if it came in and went right back out: that looks like you're a free spender, and it will cast doubt on your willingness/ability to repay the loan.

How better use a gift:

Presuming your average balances are already "ok", the best way to utilize the gift-from-dad is in one of the following manners, in my opinion:

  • invest it into something making more than the mortgage costs
  • take small amount from it over the course of a year or two and make additional/bigger mortgage payments
  • leave it in your emergency fund account, and hold onto it
  • What if the down payment from Dad were deposited into a savings account/emergency fund, or transferred there immediately after it was deposited into the checking account? Does the money for the down payment have to come from the checking account only? – Dilip Sarwate Jul 27 '12 at 16:31
  • @Dilip Sarwate - I've simplified to a single account. In any case, the bank is going to look at average balances. They're also going to do an extensive asset check across your whole financial life. Hiding assets is going to hurt you with the bank/credit union - this is NOTHING like getting a credit card and under-reporting your income, for example. See edit. – warren Jul 27 '12 at 16:36
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    Your edited answer, especially the added part of how to "better use a gift" makes little sense. If the house buyer already has $10K, say in an emergency fund_ that will be used for a down payment, then the $10K gift from Dad is irrelevant to the discussion. But in the scenario considered here, the $10K is the down payment, and is not available for the better uses which you suggest. – Dilip Sarwate Jul 27 '12 at 16:45
  • @Dilip Sarwate - we seem to be two ships passing in the night. By definition, an "emergency fund" is not a "down payment fund" - a down payment is not emergency! – warren Jul 27 '12 at 18:55
  • Warren, money is fungible and the name of the account from which the $10K down payment is taken is not important. What you need to explain is where the $10K down payment comes from since you talk of holding Dad's gift in the checking account for 3 months, then investing it in something that earns more than the mortgage interest rate, and using Dad's gift over a year or two to reduce the mortgage balance. But how does the mortgage come about without the down payment? And remember that Dad's gift is not to be used for the down payment even though that's what dear old Dad gave it for. – Dilip Sarwate Jul 28 '12 at 2:44

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