Is this mortgage fraud?

Question

I have a family member willing to give me some inheritance money early to continue investing.

I know the rules involving no gift money for investment property down payments. We have enough money for the down payment itself, however that completely exhausts our HELOC.

My questions: are gift funds ok for the 6 months cash reserves?

And

If my family member instead of giving me just cash, made a large payment directly into my heloc to pay it down, would that still be considered gift funds as a down payment / cash reserves? Or do they not look at where those payments are coming from ?

The first investment property we bought, we were preapproved without having either the down payment or reserves in our bank account. Once the actual loan app started, we were asked to deposit them, which we did from our heloc. Just curious as to how banks look at it.

Please note, I’m not trying to skirt the system, I’m asking so that I don’t do anything to either kill a potential deal or get in trouble :-)

Jay Hinrichs · Answer

Just sayin  but 100% financing rentals Is HUGELY risky.. if you cant save enough for a down payment and your using your homes equity .. that's better used for quick profit makers not long term holds that barely make any cash flow..  Not sure why anyone would do that.

Matt Groth · Answer

Equity is just a unrealized value at this moment in time. People had tons of equity in 2007, only to be underwater a year later. The risky part is that it is your primary. Job loss, vacancy, unit becoming untenable for a time due to damage or some other factor....without reserves to cover, you lose YOUR house. Also, plan an exit. If the market dipped 10 percent in 2 years, and your life changed for whatever reason and you had to sell it all, what would happen? If you are comfortable with some of those "what if" scenarios, go for it. We are not very risk averse, and so far it has worked. We are building up more reserves than the past few years, and I sleep better. I would heloc an investment property, not my primary. When @jayheinrichs says risky, you dont have to agree, but at least look at it taking into account the variables.

George Mevawala · Answer

@Andrew Narsi should be able to help you out with this question @Jena Richards. He is one of the sharpest lenders I know, and sounds like something he will have a solution for if you want to pick his brain.

John D. · Answer

You may not even need to show the bank 6 months reserves (although of course you should have them available).  Your question is best asked for a mortgage broker/loan officer that is intimately familiar with the product he is intending on using for your loan.

Account Closed · Answer

I agree with @Jay that it's pretty risky investing, but the answer to your question is yes, it's okay. You don't specify the amount of the gift and I don't need to know, but the lender will have to report any amount over $10,000 to the IRS. The lender "may" want to see seasoning (90 days or more in the bank account) but it varies by lender. They treat things differently if it is a "loan" vs if it is a "gift".  With a loan you have an increase in your debt to income ratio because of the payment that has to be accounted for.  Lenders don't want to see "mattress" money that doesn't have a clear source. Telling them you got it from Louie the loan shark probably won't accomplish your goal, but having it in the bank for 90 days before funding should be okay. You have to ask the lender what their particular seasoning requirements for that particular type of loan is.

Caleb Heimsoth · Answer

@Jena Richards this is risky because most HELOCS are callable.  Even if you’re making the payments the bank could call the amount owed due.  When this happens and if you don’t have the cash, they could foreclose.  That’s why it’s risky.  Since it’s attached to where you live, you’d lose the house.

If you put a large deposit in your account, be prepared for a conventional lender to source that money.  You’d then likely have to sign a letter saying it’s an inheritance and not a loan.

If you don’t want to do that, put it in your bank account and wait 2 months.  Most banks only go back 2 months

Anthony Gayden · Answer

Your HELOC might not be maxed out, but you still have to make payments on it for the money you borrow. Those payments cut into your cash flow. In the case of many investment properties, there would be little or no cash flow if they were 100% financed. If there are any major repairs or unexpected costs incurred, you could be coming out of pocket. If you have a problem tenant that does not pay, suddenly you may be not only unable to pay your mortgage on the investment property, but also the payment on the HELOC, which would put your primary residence at risk. That is why it is a bit riskier.

Keeping that in mind, I would do it as long as you run the numbers correctly. I have done similar on several purchases.

Jena Richards · Answer

I’m not sure what is risky here. I’ve owned my primary residence for only 4 years and have 150k in equity in it. I moved some of that equity in the form of a heloc to an investment property that cash flows.

My grandfather wants to give me inheritance early. I don’t want to trigger a large deposit into my bank account during the loan process from him, so can he just pay my heloc directly is all I’m asking. Does the lender see a large payment on my heloc the same way it sees a large deposit into bank account?

My heloc is not maxed out, my equity is not completely drawn and there are no loans or refinances on my investment property. Had my grandfather not stepped up saying he wanted to do this, I wouldn’t even be looking at another property.

Thanks for the advice regarding gift money as cash reserves and seasoning. I will absolutely ask my lender their specifics

Jena Richards · Answer

We bought our primary before ever dreaming of investing and put around 35% down on it. Obviously it would’ve been nice to know then what I know now. Our home appreciated 50k over 3 years and by then I knew I wanted to invest. So it isn’t that we weren’t able to save a down payment, it’s that we put too much of our savings into our first home.

Our first investment property is cash flowing, not immensely, but that’s mainly because it’s a vacation rental that we enjoy in the off season. This year it’ll rent during the winter and cash flow nicely.

The property I’m looking cashflows very well.

The point of my question involving someone else paying down my heloc is because I don’t want to over extend myself.

Our heloc is not maxed out and we have savings.

Is this mortgage fraud?

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