Down payment gifts subject to ‘bizarre and invasive’ scrutiny

Q: Why does my mortgage broker need my gift donor’s bank information? My gift was in a certified check from a reputable credit union, accompanied by a gift letter provided by the bank. She is not comfortable giving out her account information.

A: There are a number of lender requests that seem nothing less than bizarre and invasive. But, in the words of my dear old dad, "He who has the cash makes the rules." Long story short, the bank has the cash you want, so it gets to make the rules about what you must show and prove to it for it to lend you hundreds of thousands of dollars, or more.

1. The request for the source of your donor’s account statements is common and understandable. Even though it sounds strange, the request to show the account from which the gift is sourced is actually a nearly universal lending guideline on today’s market. Why? Among other things, lenders and those that guarantee home loans want to be sure that you are not taking a loan vs. a gift (hence the requirement of a letter verifying that the cash being given is a gift and not a loan).

If it’s a loan, then that changes your debt-to-income ratio and the reserve cash that you’ve shown as a cushion to make sure you’ll be able to make your mortgage payment even if you have a rough month or so.

In the same vein, lenders want to be sure that your donor has not taken out a loan in order to make a gift to you. It’s not bizarre to understand that someone might get a so-called gift on the surreptitious agreement that he will just pay the donor back so the donor can pay her own lender back. Lenders don’t want the situation where some short-term loan that requires repayment starts putting pressure on your donor a month or two after closings, which trickles down into pressure to you, the borrower, to pay the donor so she can pay the loan.

Lenders are basically operating under the idea that if your donor actually earned or otherwise owns (rather than borrowed) the cash to make you a gift, then the chances that you’ll be subjected to repayment pressures that disrupt your ability to make your mortgage payment are minimal.

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To ensure this is the case, lenders ask to see where your donor got the cash — if from the donor’s own accounts, they want the account statement. Not only that, if the money came from a relatively recent deposit to the donor’s account, they might even ask to see documentation of where the funds for that deposit came from (e.g., a paycheck stub, etc.).

2. You can’t argue your way out of it. As you are probably aware, the federal government, through Fannie Mae, Freddie Mac and the Federal Housing Administration, basically insures or guarantees upwards of 90 percent of the home loans being originated today. That means that a lender makes the loan, then sells the loan to one of these agencies so they can have cash in hand to make more loans to other borrowers.

In order for the lender to sell the loan, the loan must comply with these agencies’ guidelines, including documentation around the donor’s source of funds. Long story short, this means that no matter how strenuously you or your donor objects, you will not be able to secure your loan without providing this documentation.

3. There are some workarounds and solutions you should know about. If your donor has privacy concerns, she can probably simply redact or black out with a marker the most sensitive parts of the documentation, like all but the last four digits of her bank account number and any Social Security numbers or other sensitive information that is on the document, before she faxes it to you.

Ask your mortgage broker what information your donor must leave intact; the underwriter will definitely need to see the donor’s name to verify that the document is valid. It might also be helpful to authorize your mortgage broker to talk directly with your donor, to explain the legitimate reasons this information is required.

If your donor absolutely refuses to provide you with account information, you can simply deposit the gift into your own accounts and let it "season" for two months before proceeding through the underwriting process. If you go two months with the cash in your account, the underwriter will presume the cash belongs to you and no longer considers it a gift. That said, that might not be helpful if you are already in the process of buying a particular home.

Tara-Nicholle Nelson is a real estate broker, attorney and the author of two critically acclaimed books on real estate. Tara also speaks and writes on the art and science of life transformation at RETHINK7.com.