CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
Hey Folks,
I'm in the market for my first property (investment and otherwise) and was on the phone with a loan officer earlier today. The original plan was that my parents would match my cash contribution and classify it as a gift for tax purposes. The loan officer informed me that if my parents gifted me money, I would not be allowed to use that money for the purchase of an investment home. A personal residence yes, but not an investment home.
I am trying to understand why (and if) this is true. In my mind, if I get qualified based on my personal assets for a certain loan amount, why couldn't my parents come in on top of that and gift me money to use toward the purchase? Why would that have any effect on the loan qualification?
Additionally, he said even if my parents loaned me the money and there was supporting documentation, I would not be allowed to use it for the home purchase.
I'm pretty confused and I am hoping for creative solutions to the problem. I have a call again later this week and I want to have smart questions to ask him.
One thing I thought about was forming an LLC and having my parents contribute to that LLC. Would that be an option?
I'd like to understand how other people are able to obtain private money and legally purchase properties with it. Thanks!!
Albert gives good advice basically, but let's not go with 2 banking statements, 2 months, xx days or the like. such isn't standardized to all lenders.
Most originators/lenders will ask for the last two or three months of bank statements. You have another issue on deposit inquires asking for the average balance, you can look to average balances and then see a jump in the account, they may look back 6 months or a year.
Secondary requirements are based on large pools of loan losses and problem loans, areas of similarity become identified as areas of concern, they set guidelines and are also securitized requirements to the investors buying those loans as being compliant. If they see that 120,000 Mikes got money from mom and dad and went belly up later on, then that is an indication that money from mom and dad is a factor in making a bad loan. Investors usually don't want bad loans......I saw usually now, post 2008.
There is another issue, money laundering, much less tax evasion, the last thing a lender wants is to loan money and then have a borrower zapped for financial fraud, evasion, laundering, undeclared earnings, quiet business transaction like dealing drugs, so rules and guidelines are there for a reason. Audit trails are set to discover such activities.
The other issue is folks getting "gift funds" mixed up with a "gift", nothing wrong with a gift given to you and explained as opposed a gift to buy a property, strings are attached, the gift is for this use. It also is a reflection on your ability to manage, your motivation will be higher if you earned the money than if mommy and daddy write checks for you....in that, put mom and dad on title.
You could buy with your parents and later they can deed their interest to you under the guise or real aspects of estate planning, you're related, no due on sale or abandonment of interests issues, done all the time.
Have you parents do the same as members in the LLC, they can be removed later.
Folks that use underwriting guidelines or rules of some lenders are usually not aware of the backroom audits accomplished after closing and then usually again within one year. Those verifications you sign aren't based on a one time shot, they can be used later on to re-verify the representations made by a borrower, so I suggest you ask the bank how you can rather than taking loophole suggestions.
When you say gift money, that is attached to that purchase, so don't use gift money, partner or sell something or receive an estate distribution and season those funds for 90 days so that it isn't obvious that the funds were to buy property two months or two weeks later. It also shows that the person gifting had no knowledge of a specific property. Your large cash transaction report that may be generated by your bank for the deposit of the gift will fall out of concern after 90 days as well.
If you're not in a hurry, dribble funds into your account, $500, 900, at a time for deposits, may not even trip a large cash transaction report. Not that you need to be concerned about the report but it is an audit trail if you do pull suspicious activities trying to out smart the system.
A rental can be booked as a commercial real estate loan by a small lender, there can be exceptions made under compensating factors in underwriting.
Boils down to giving full disclosure in you loan application and not getting nailed for mortgage fraud, the bank wants to make a loan if they can, so inform and work with them, don't try to out smart them. As mentioned, talk to smaller lenders there can be a big difference between what they can do, will do or can't do,
What you're probably running into is the bank's underwriting guidelines for residential investment property.
Investment rules are tighter than owner occupied rules. Banks assume that you're going be take more risks with an investment property than with your own home. History has shown this to be true.
Residential rules are much tighter than commercial rules. They assume that the borrower is the main source of repayment of the loan. They know that a vacancy is going to hit a borrower directly. In commercial, you have more units and therefore the performance of the loan has more to do with the performance of the property than borrower strength alone. If you tell the bank that you're getting money from your parents to help with the downpayment, you're telling the bank that you are a weak borrower. In my commercial portfolio, the banks want me to fund the downpayment, AND keep a liquid cash reserve. Failure to maintain a sufficient cash reserve is actually a condition of default under the terms of the loan.
Note that there are many different banks with vastly different underwriting guidelines. Just because one bank says no, doesn't mean they all will.
Are you looking for a high ratio insured mortgage? If so, then the underwriting guidelines for Fannie Mae and Freddie Mac will also be applied in addition to the bank's rules.
Generally, if you've had the funds for more than 90 days, then the bank may consider the funds to be yours. That may help you get around the problem.
Hey @Victor Menasce thanks for your reply! I figured most of the items in your reply were the cause of it. I also figured that by targeting (and specifying that I was targeting) tri and quadplex properties that it may help a bit, but it didn't.
Are there any creative ways to utilize a mortgage and couple it with another type of loan? I thought I was already being semi-creative with the financing but I guess I was too naive. Rather than a mortgage, I assume the next most popular option would be to finance it with private money from friends and family.
How did you, or other investors secure mortgages when starting out?
@Brandon Hall First question is...are you dealing with one of the Big banks? If you are...STOP THAT!!!
Seriously, go talk to some small, local lenders...banks and credit unions. Talk to a commercial loan officer. You're looking for lenders who service their own portfolios of loans and do not package and sell them. That gives them a lot more flexibility around underwriting guidelines.
There are no laws that prevent you from using a gift to purchase an investment property. The only time you run into a problem with a gift is when you are purchasing with an insured mortgage. In that case you are generally going to have to provide documentation that it is indeed a gift, and you will not be required to repay the monies.
And, in terms of the LLC, yes. You're parents can contribute to an LLC and avoid this discussion entirely. However, the LLC will show an obligation to your parents. You would need to work with a CPA &/or lawyer to determine how to handle that.
Easiest solution is simply to find a more flexible lender.
Brandon, I think the previous replies should answer your questions. I would add that any gift over $12,000 is taxable. Also, no one can tell you (or your parents) what to do with your/their own money. Only thing would be bank rules.
I'm in the market for my first property (investment and otherwise) and was on the phone with a loan officer earlier today. The original plan was that my parents would match my cash contribution and classify it as a gift for tax purposes. The loan officer informed me that if my parents gifted me money, I would not be allowed to use that money for the purchase of an investment home. A personal residence yes, but not an investment home.
I am trying to understand why (and if) this is true. In my mind, if I get qualified based on my personal assets for a certain loan amount, why couldn't my parents come in on top of that and gift me money to use toward the purchase? Why would that have any effect on the loan qualification?
Additionally, he said even if my parents loaned me the money and there was supporting documentation, I would not be allowed to use it for the home purchase.
I'm pretty confused and I am hoping for creative solutions to the problem. I have a call again later this week and I want to have smart questions to ask him.
One thing I thought about was forming an LLC and having my parents contribute to that LLC. Would that be an option?
I'd like to understand how other people are able to obtain private money and legally purchase properties with it. Thanks!!
HI Brandon,
It seems you need a more creative loan officer who instead of saying you "cant," rather looking for ways for you so "that you can," receive a gift.
Solution:
- money in your account for 2 full banking cycles in which the beginning balance and the ending balance are near similar balances is considered yours
So get the gift keep it in your account for 60-75 days prior to signing a contract and then you'll be able to use those funds in a purchase transaction for a non owner occupied property.
You cannot use gift or borrowed funds from others. When you hear this statement dont take it as a statement of fact, instead ask "then in what instances can I use borrowed funds and what is your definition of "my funds" or "your," funds or what can I do to make those funds "allowable," funds. The problem with most loan officers is that they are not investors. Investors think creatively.
There are many theories that can be delved into on why Fannie Mae doesnt allow you obtain borrowed funds or gift funds in the middle of the transaction but short to say its a rule if you'd like FNMA money you must abide by them or find a loan officer who is more strategic in their planning for you.
Can you find a portfolio bank out there who will? Perhaps in the 1-4 residential space its very rare but it is possible, yes.
In commercial you can borrow the down payment and borrow the banks money as long your investment meet's cash flow requirements and you can document your competence, opportunity, and track record.
Brandon, I think the previous replies should answer your questions. I would add that any gift over $12,000 is taxable. Also, no one can tell you (or your parents) what to do with your/their own money. Only thing would be bank rules.
That used to be the IRS limit for annual gifts. In 2014 its up to 14K its inflation indexed annually and anything over goes against your maximum lifetime exclusion of 5.34M.
@Albert Bui Thanks for your posts - so to clarify, I cannot use a cash gift to purchase a home unless it has been sitting in my bank account for 2-3 months which would be outside or the "two banking cycles" correct?
Does that change with smaller/local banks as mentioned by other posters?
I were to create a LLC where I either grant my parents equity or I, as the owner of the LLC, take on a loan from my parents, would that change the situation at all? From my understanding, banks typically shun lending to LLCs.
@Albert Bui Thanks for your posts - so to clarify, I cannot use a cash gift to purchase a home unless it has been sitting in my bank account for 2-3 months which would be outside or the "two banking cycles" correct?
Does that change with smaller/local banks as mentioned by other posters?
I were to create a LLC where I either grant my parents equity or I, as the owner of the LLC, take on a loan from my parents, would that change the situation at all? From my understanding, banks typically shun lending to LLCs.
Portfolio lending (your reference to lending to LLC's) is case by case as the one in your town will be different then my town.
The seasoning requirement is two full months of bank statements if you have that with conventional financing then you're fine you can use the funds to purchase a non owner property. I say two full banking cycles because the typical borrower sends me the state in which the money entered or was deposited into the account and that is unacceptable. It has to be two full months where the beginning balance already reflects all funds needed for reserves (6months pitia) and enough for down payment and closing.
Make sense?
If you plan correctly almost anyone who was said to have been declined can once again qualify....
In your OP you said you would qualify without the gift. If that is so, you can either take the gift well in advance so that it sits in your bank account for a sufficient time as @Albert Bui posted, or just accept the gift after closing then apply it to reduce the loan principal amount. A newly formed LLC will have a hard time to qualify for a loan, and any LLC won't qualify for conventional loans.
Albert gives good advice basically, but let's not go with 2 banking statements, 2 months, xx days or the like. such isn't standardized to all lenders.
Most originators/lenders will ask for the last two or three months of bank statements. You have another issue on deposit inquires asking for the average balance, you can look to average balances and then see a jump in the account, they may look back 6 months or a year.
Secondary requirements are based on large pools of loan losses and problem loans, areas of similarity become identified as areas of concern, they set guidelines and are also securitized requirements to the investors buying those loans as being compliant. If they see that 120,000 Mikes got money from mom and dad and went belly up later on, then that is an indication that money from mom and dad is a factor in making a bad loan. Investors usually don't want bad loans......I saw usually now, post 2008.
There is another issue, money laundering, much less tax evasion, the last thing a lender wants is to loan money and then have a borrower zapped for financial fraud, evasion, laundering, undeclared earnings, quiet business transaction like dealing drugs, so rules and guidelines are there for a reason. Audit trails are set to discover such activities.
The other issue is folks getting "gift funds" mixed up with a "gift", nothing wrong with a gift given to you and explained as opposed a gift to buy a property, strings are attached, the gift is for this use. It also is a reflection on your ability to manage, your motivation will be higher if you earned the money than if mommy and daddy write checks for you....in that, put mom and dad on title.
You could buy with your parents and later they can deed their interest to you under the guise or real aspects of estate planning, you're related, no due on sale or abandonment of interests issues, done all the time.
Have you parents do the same as members in the LLC, they can be removed later.
Folks that use underwriting guidelines or rules of some lenders are usually not aware of the backroom audits accomplished after closing and then usually again within one year. Those verifications you sign aren't based on a one time shot, they can be used later on to re-verify the representations made by a borrower, so I suggest you ask the bank how you can rather than taking loophole suggestions.
When you say gift money, that is attached to that purchase, so don't use gift money, partner or sell something or receive an estate distribution and season those funds for 90 days so that it isn't obvious that the funds were to buy property two months or two weeks later. It also shows that the person gifting had no knowledge of a specific property. Your large cash transaction report that may be generated by your bank for the deposit of the gift will fall out of concern after 90 days as well.
If you're not in a hurry, dribble funds into your account, $500, 900, at a time for deposits, may not even trip a large cash transaction report. Not that you need to be concerned about the report but it is an audit trail if you do pull suspicious activities trying to out smart the system.
A rental can be booked as a commercial real estate loan by a small lender, there can be exceptions made under compensating factors in underwriting.
Boils down to giving full disclosure in you loan application and not getting nailed for mortgage fraud, the bank wants to make a loan if they can, so inform and work with them, don't try to out smart them. As mentioned, talk to smaller lenders there can be a big difference between what they can do, will do or can't do,
Thank you for the replies. I will talk to a smaller lender and let you know what they say. @Bill Gulley , I appreciate your in depth reply!
I find that people on the blog want simple responses to very complex scenarios so responses can never fully address all ancillary rebuttals and situations, however my response applies to conventional financing (FNMA/FHLMC) guidelines. If you want your loan funding to be an "after thought," then you can have the assets documented and "seasoned," as mentioned above and you will have a notary calling you soon to sign your loan docs so they can be funded/closed in a timely manner.
Bill does bring up a good point, as of June this year, 2014, Fannie mae adjusted their guidelines to document deposits within the 2 month of bank statement period prior to closing a loan to be:
- all deposits over 50% of the borrowers monthly gross income must be sourced and all funds that cannot be sourced or are unacceptable to the transaction cannot be used
so if you make 10k and your deposit is 4k it will not need to be sourced to be used within the scope of your loan closing, but why even chance that? Just keep enough for closing costs, down payment, and reserves required in your account for a min of two banking cycles rolling into closing and fund.
If you're trying to get all of your funds into your account within the last 2-3 months prior to closing on conventional loan transaction then you're asking for potentially high chances of stress and discouragement.
If I am reading this correctly, you already qualify for the loan. Can you just purchase the property and then make a large balloon payment with the "gift" from your parents?
Once the loan is in your name, it shouldn't matter where the funds to pay for the property come from.
Now the IRS and taxes would be a different question that I couldn't answer.
@Shaun Carl I do qualify for "a" loan but I was trying to include the cash gift as part of the down payment to increase my purchasing power.
I could make a large balloon payment, but at that point I'd want to use the cash gift in a more effective manner return wise.
I am only going through the pre-qual process. I have a few properties I am targeting but I am not rushing to get a deal done so I have time to figure this out.
I spoke to a small lender in the local area I am looking in to. He also has not heard of that rule, but did say different lenders have different requirements as many of you have been saying here.
I am speaking with a few more lenders and I will report back here with my findings tomorrow evening. Thanks for the help so far everyone!
@Arthur E. By the time I found a multi-family I wanted, I had banked enough cash to make this whole issue a moot point. However, the best workaround I found for future use seems to be to let the gifted funds "season" for two months in your bank account in order to be able to use them toward a down payment. This is in relation to Fannie/Freddie loans.
Portfolio lenders and small credit unions/local banks seemed to care a lot less about where the funds came from and more about my DTI ratio.
This problem is more common then you think. I have had the problem with both a credit union and a mortgage lender wanting documentation on where gift money coming from. 100% of the time so far, the underwriter won't allow gift money if it has been less then 60 days. So because my family and my wives family gift us every year but we don't use that money for real estate investments but most banks will subtract that amount from your liquid savings. My brother in law has had similar issues.
This problem is more common then you think. I have had the problem with both a credit union and a mortgage lender wanting documentation on where gift money coming from. 100% of the time so far, the underwriter won't allow gift money if it has been less then 60 days. So because my family and my wives family gift us every year but we don't use that money for real estate investments but most banks will subtract that amount from your liquid savings. My brother in law has had similar issues.
Hi Marcus,
This "problem," as you mentioned is only a problem depending on where they are selling the paper. If the institution, credit union, mortgage banker, big banker(Citi, Chase), plan to sell this paper to FNMA/FHLMC then they'll have to adhere by the guidelines mentioned in this thread in order to become marketable on the secondary markets otherwise the institution risks originating a mortgage that is unsellable or has to sit on the warehouse lines to season for 6-12 + months before it can be sold on the scratch and dent market for far less than if it had been underwritten or originated correctly.
Those are some of the complexities the banks have to deal with however there are options that arent so strict. If its a community bank and they in tended to portfolio all the paper sure it will be like the wild west where anything goes as long as its prudent and reasonable for your given scenario. Community banks can give you compensating factors based on your relationship with them, track record, and assets/deposits with them. It also helps if you play golf with the owner of the bank too.. (jk, but no really it would) =).