Not too long ago, home buyers who got part of their down payment from their parents or other relatives didn't have to worry much about getting a mortgage. Lenders understood that many folks wanted to help their kids buy a house, so loan officers didn't ask too many questions.
Now, all that has changed. Whether you're a would-be buyer who'll be getting financial aid from your folks or are a parent who wants to help out a grown child, the lender will want to know more about where the money came from and whether it must be repaid.
"It's no longer a matter of mom and dad simply giving their kids the down payment and forgetting all about it," said Bill Jacobs, president of GN Mortgage Co. in the West Hills area of the San Fernando Valley.
"Now these types of gifts require a little more paper work and documentation."
If you're buying a house and plan to get part of your down payment from your folks or someone else, the lender will likely require a "gift letter" signed by the person or people who are giving you the money.
"The gift letter should include three elements," Jacobs said. "First, it should state the relationship between the borrower and the person who's making the gift.
"Second, it should state the amount of the gift. And finally, the letter should clearly state that the money is truly a gift instead of a loan that has to be repaid."
If the money is indeed a loan, the lender will take that into consideration when deciding how much you can borrow--or whether it will make the loan at all.
Even if the money is a gift with no strings attached, some lenders will want to be sure that at least part of the down payment comes from your personal funds.
"Most lenders like to see borrowers put up at least a portion of the down payment," said Mary Jo Stenger, an executive with Camden Financial Services in Brentwood.
"If a borrower buys a house and has some of his own money at stake, he's much more likely to make his payments on time and much less likely to walk out and leave the lender holding the bag."
Stenger said her institution and many other lenders will waive this requirement--or at least look at your loan application in a more favorable light--if the gift is big enough to constitute a 20% or 30% down payment.
Lenders like large down payments because it reduces their chances of losing money if they must eventually foreclose.
In some instances, the lender also will want to see where the person who's making the gift will get the money in the first place.
For example, if you're planning to get $20,000 from your parents but you don't yet have the money, the lender may ask for a copy of your parents' current bank statement, stock-brokerage report or other documentation showing that they have the cash readily available.
Even if the gift has already been made, Stenger said, the lender may ask the giver to provide financial statements showing where the money actually came from. If that's the case, both you and your folks may be asked to produce bank records and the like.
Although financial institutions have rather effective means of tracking down the source of a borrower's down payment, some lenders sheepishly admit that their system isn't perfect.
For example, some borrowers and their parents submit letters stating that the cash that's being transferred is an outright gift, but make a verbal agreement on the side calling for the loan to be repaid.
"If we knew that the money was really a loan, we'd count it against the borrower," said one loan officer. "But if they present a gift letter stating that the money is a gift, we usually have to take that at its face value.
"We know that some borrowers and their parents lie, but there's really no sure-fire way to prove it."
Other borrowers seek to get around disclosing gifts or loans from outside sources by putting the money in their name several months before they actually go looking for a loan. That's because, if the money has been in the borrower's account for several months, the lender probably won't ask how it got there.
Conversely, if the average balance over the past three or six months has been $3,000 and it recently zoomed to $20,000, the lender will likely want an explanation for the sudden windfall.
Of course, purposely providing a lender with inaccurate or misleading information is a risky proposition. If the lender discovers the discrepancies while the loan is being processed, there's a good chance that your application will be automatically rejected.
If the lender makes the loan and later finds out about the inaccuracies, it may be able to demand that you immediately repay the money in a lump sum.
In a worst-case scenario, you might even have to pay a stiff fine or wind up in jail. After all, knowingly putting false or misleading information on a loan application is a federal crime.