Keys to Helping a Family Member Buy a Home Now
If you plan to help your family member purchase a home, take heed: Transferring money among different bank accounts is going to make their homebuying process stickier. Furthermore, if you're unable (or refuse) to document the origin of the monies you transferred, you can only impede your family member's home purchase. Here's the scoop.
Donor funds must be documented, sourced and paper-trailed. Let's say you're helping your daughter buy her first home. The amount you plan to give her is $20,000. Her mortgage lender or broker originating her loan will need you to sign a gift letter stating the relationship, and to identify the account where the money is coming from. Formerly, you were required to show only the most recent%VIRTUAL-pullquote- You can make the process quick and easy by moving the monies one time....% statement on this account. However, new lending regulations now require two months of statements showing where these funds are coming from.
Where Things Become Sticky: If you plan to provide gift funds for your family member buying a home, keep it simple and have the funds in the account ready to go for use in the transaction. If your checking account, for example, has $10,000, and a new deposit or transfer comes into this account from another source totaling the $20,000 you plan on donating, things just got more technical. The lender will need to see where the additional funds came from, and sourcing the money movement.
All monies must be accounted for to fully support that there is no money laundering or fraud-related activity. Mortgage companies must adhere to this level of scrutiny, but it doesn't necessarily have to be difficult. If the money to be donated is not in the account you plan to use, take this example as guide. Say the money is coming from a money market account where all your assets are kept. It would be tremendously easier to simply wire the monies from the asset account where the monies normally reside directly to escrow, bypassing your child's checking account, which typically has daily transfers and withdrawals as most people use a checking account for their normal daily and/or monthly spending activities. Moving the money directly into their checking account or even your account is not necessary, and in fact it creates a scenario on paper that the donated funds for the home purchase are being spent.
If the damage if already done, re-gift the monies to escrow, otherwise it may appear your family member has shorted gift funds to close escrow.
More Movement of Money Equals More Work: If the main account where the gift funds are coming from does not have an average monthly balance equaling a reasonable amount of the gift funds due to a transfer or deposit, you'll need two extra months' statements! The lender will need the additional two months' statements from the other account showing where the transfer took place. In total, expect to give four statements, each for the last recent 60 days, detailing the origin of the money and each movement of that money and where it is presently.
The solution? You can make the process quick and easy by moving the monies one time, from wherever they originate directly to the title company your family member is using, bypassing all of the other potential accounts.
Mortgage Tip: If your family member has not yet found a home, no need to move the monies around yet, keep things status quo. Once they get into contract, then move the money to escrow for them.
Eligible Gift Money Sources: Can it be documented? If yes, then generally those monies can be used to help your family member buy a home. Here's a look at the various eligible sources:
- Monies in some type of an asset/bank account.
- Cold hard cash can be used as long as the money is seasoned, meaning it's been in a bank account for at least 60 days.
- Gift of equity can be provided from transferring family property or even buying property from a landlord; the seller of the property simply agrees to a dollar amount of home equity without needing to provide a bank statement as it's coming from the net proceeds of the home sale.
- Sale of personal property will work with an executed bill of sale along with an account showing where these funds came from.
When planning to donate monies to a family member buying a home, just be prepared when the lender asks for supporting documentation on the origin of these funds as well as a gift letter. By knowing what to expect up front, you can help make the process of buying a home much easier for your family member, especially if they are a first-time buyer.
Keep in mind that the homebuyer will need to clear other mortgage-qualifying hurdles than just a down payment. They'll need good credit, a qualifying debt-to-income ratio and can't just be coming out of a bankruptcy or short sale. (You can see where your credit scores stand for free on Credit.com.)
Scott Sheldon is a senior loan officer and consumer advocate based in Santa Rosa, Cali. His work has appeared in Yahoo! Homes, CNN Money, MarketWatch and The Wall Street Journal. Connect with him at Sonoma County Mortgages. More by Scott Sheldon