Lender doesn’t allow down payment money to be a gift
Closter, NJ · Member since 2015 · 72 posts · 19 votes
Hi,
After contacting a few lenders I’ve realized that the down payment money can’t be a gift. Does anyone have an idea how rigid is this rule and if there is a way to work around it. I did receive funds from my parents to purchase investment properties and would like to use a mix of my saving and their help.
Thanks.
If you are buying owner occupied properties then a percentage of the DP can be gift funds. If you are buying strictly investment property however, then the best way would be to transfer the money into your account and season it for about 2 months (leave it in the account for 60 days). After that it can be used as if it is your own money.
Totally agree with James and Nnabuenyi - I have a couple colleagues who received loans from the "bank of mom and dad" which a few months later they used as home loan down payments without any questions. It's like my buddy working for a local co-op always says - we (the banks) don't care about much else as long as we're getting paid each month.
This is a silent second loan and is absolutely considered mortgage fraud.
The key here is intention to mislead the lender. Failure to disclose a secondary liability associated with the house is absolutely against the docs that you sign while getting the mortgage.
Back to the OP, if there is a provision that states that investment houses cannot use gift funds and he attempts to season gift funds for 2 months to bypass this rule, this is mortgage fraud.
Are you likely to get caught for either of these? Probably not. But the only point I am trying to get across is that there are very simple ways to get past this limitation in a legal and non-ethically finangly way.
Failure to disclose a secondary liability is absolutely fraudulent and there is no argument there. If a lender specifically has a guideline that states gift funds are not to be used for the purchase of an investment property and you season those funds to get around it, thats mortgage fraud. As I stated, if you are talking about a Fannie/Freddie/HUD loan with a lender that has no overlays and therefore allows gift funds to be used, then seasoning of the gift funds is not fraudulent. Part of a conditional loan approval is writing an LOE on recent credit inquiries within 120 days and if any new debt was opened as a result. If debt was opened but hasn't been reported on the credit report and you deny that any debt was opened, that's fraud. If you privately borrow money so that it doesn't show as an inquiry on your credit report or as a trade line and fail to tell the lender about it, that's loan fraud. However, we are talking about gift funds and gift funds are not considered as a liability, which is what I was referring to. If you receive gift funds, which are considered a grant or non repayable funds, you can season it and have it be considered yours and its not fraud (so long as that lender allows the use of gift funds). If you are dealing with a commercial loan, then its up to that lenders rules and you have to play by whatever those rules are. Now, in reality, most people pay back the gift funds out of respect or courtesy, but not as a debt in the traditional sense. Chances are if you personally borrowed money from your parents, you would probably assure them you will pay them back, but that's getting into the grey area of gifting and whether or not its really a GIFT or a liability. There are others way to go about handling gift funds or other assets that aren't sourceable that's also legal and ethical, but as far as Fannie/Freddie/HUD goes, I was just answering the original question pertaining to gift funds. Point is to make sure you understand that lenders specific guidelines so that you aren't doing anything illegal or unethical because no two lenders are exactly alike in what they allow, even on the conforming loans.
I agree with you on the loan part but not on the gift funds. According to the govt regulations as written by Fannie and Freddie, once you have gift funds (or any funds) in your account for 60+ days it is no longer considered gift funds but just part of your own funds.
That means that you are not using gift funds to purchase property. You are using your own funds. After a certain amount of time all the funds in your account are considered yours. If fannie changes the regulation to 6 months then you can get money from relatives and in 6 months use it for a DP. It just happens to be set at two months.
I ran this by my attorney at he agreed that it is not fraudulent unless the bank has its own overlays. I want someone to show me documentation of this being prohibited by Fannie/freddie. All the written govt documentation i have read corroborates that funds are considered yours after 60 days no matter the source (as long as its legal). Please show me where it says otherwise.
My apologies Frank, was checking my phone on this and didn't realize you were quoting Bill. Borrowing money from "Bank of mom and pop", seasoning it and using as a down payment later is definitely loan fraud. Even if the new debt is already reported and included with the DTI, the 4th of page of the loan app asks if any of the down payment is borrowed, if you're checkin' no, you're committing loan fraud. In that scenario, it wouldn't be impossible for an underwriter or auditor to start connecting dots when they see the debt on the credit report was opened 2 or 3 months prior to the loan and then just so happened to have roughly that amount in the bank. That's playing with fire for sure...
But wouldn't "borrowed" mean that you have to pay it back? I would not consider a gift as borrowed.
When I bought my duplex, my lender knew I wanted more money for a down payment, and asked me if any of my family could gift me the funds. At the time they could not.
I agree with you on the loan part but not on the gift funds. According to the govt regulations as written by Fannie and Freddie, once you have gift funds (or any funds) in your account for 60+ days it is no longer considered gift funds but just part of your own funds.
Hi Nnabuenyi, thanks for the clarification.
I think we are addressing different points. My point is more specific. The OP has been told by a lender that they may not use gift funds to pay for investment property.
This is more the point I am trying to make.
If the OP were to season funds for 60 days and then go to a different lender for underwriting (preferably one without any lender-specific stipulations about gift funds), I agree with you and I don't see any problems with this because of the points you mentioned.
In the end I think my response to your original post was too much of a blanket statement since seasoning is a legitimate strategy, but it is important to see that there is potential to walk into a very bad decision if the OP is not careful about their actions.
Recommendation is to keep talking with other banks with full disclosure regarding the gift funds and allow the lender themselves to say whether or not it is acceptable.
It's a deceptive practice to qualify for a loan under false pretenses by "seasoning" those gift funds. I work at a large bank and it's definitely considered fraud.
That's fine if anyone disagrees, but at the very least I'd say it's a question of morality.
You could see if the "donor" can be added to the loan, that would a great alternative too.
Ineligible funds are ineligible, it doesn't matter how far back they were deposited. That's why Fannie Mae doesn't say 2, 6 or 12 months. They just flat out say you can't use it.
The reason most lenders only require 2 months seasoning on large deposits is because they want to make sure that the deposits are not the results of new incurred debt. The thinking is that after 60 days the new liability should be reporting on credit, and thus calculated in the DTI.