Reader Question: Do underwriting guidelines vary between lenders?

I recently received this email from a Mortgage Porter subscriber:

Do different banks need different underwriting documents? I am talking to two lenders now, and one will give me a lower rate but asks for the bank statement from my family which wires me money; the other one has a higher rate but only needs a gift letter. Is it because some banks are more strict because of their lower rate? Thanks.

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Gifts from the Bank of Mom and Dad – Part 2: Conventional Financing

Often times when gifts from family members are involved, borrowers my opt to use FHA financing since the guidelines are (currently) more flexible than conventional with regards to gifts.   With FHA, a gift from a family member can go towards to borrowers minimum required investment with conventional financing, it cannot.

Here’s an example.  Let’s say we have a sales price of $265,000 with 10% down payment creating a loan amount of $238,500.  Once you factor in estimated closing costs of $2,400 and and prepaids/reserves of $3,100; the amount due at closing is roughly $32,000 (10% down = $26,500 + $2,400 + $3,100).   The borrowers also have a $5,000 contribution towards closing costs from the seller.

At this loan to value, with conventional financing requires that the borrower invests a minimum of 5% of their own personal funds into the transaction.  Unlike FHA, these funds cannot be gifted from the family members.   NOTE: if the gift is 20% down or more, the 5% rule for conventional financing does not apply (the whole down payment can be gifted).

Staying with our example, this means that the borrower must contribute 5% of $265,000 of their “seasoned” funds = $13,250.

With the amount due at closing at $32,000, the borrower must contribute at least $13,250 (5% of the sales price) of their own funds towards the $32,000 (10% down payment).  This leaves $18,750 remaining “due at closing”.   The borrowers earnest money check (if sourced – meaning documented as being their own funds) can count towards the 5% investment requirement and so can deposits with the mortgage company.   For example, the our borrowers submitted an earnest money check in the amount of $5,000 with their purchase and sales agreement, they would have $8,250 remaining to invest into the transaction of the 5% requirement ($13,250 – $5,000 = $8,250).

Once the borrower meets the 5% down payment, the gift and any seller credits can be applied towards the transaction.   A seller contribution can only go towards allowable closing costs and prepaids.  With this scenario, that totals $5,500 ($2,400 + $3,100).  The seller cannot contribute more than $5,500 (actual closing costs and prepaids).  

Unlike a seller contribution, the gift from parents can be applied towards down payment or closing costs/prepaids, once the borrower’s 5% investment is met.  If your gift from the parents is larger than the remaining amount due at closing, you can either reduce your loan amount or not use the entire gift.  NOTE:  Your parents may want to check with tax adviser regarding possible tax implications with gifting funds.

With FHA financing, their is also a minimum required investment from the borrower, which is currently 3.5% of the sales price.  A gift from parents CAN be applied towards the borrowers minimum required investment (the 3.5%).

When parents provide a gift with conventional or FHA financing, they need to be prepared to provide documentation of where the funds came from.  They will sign a gift letter and provide a recent bank statement showing that the funds are available.  There also needs to be a “paper trail” documenting the transfer of the gift funds (photo copy EVERYTHING–you’re better off having too much paper work to provide your mortgage originator than not enough).

If you have questions about financing a home located in Washington State, please contact me, I’m happy to help!  We have both FHA and conventional programs available.

Related post:  Gifts from the Bank of Mom and Dad – Part 1: FHA

Gifts from the Bank of Mom and Dad – Part 1: FHA

Home buyers using FHA to finance the purchase of their home can get help from family members towards the down payment and closing costs in the form of a gift.  NOTE:  With the passage of HR 3221, parents will actually be able to contribute towards the down payment and closing costs as a loan instead of a gift (more info to follow–this is not in effect until October 1, 2008).

Both FHA and conventional mortgages allow for gift funds; they have different requirements.  Part 2 of this post will address gifts when conventional financing is involved. 

FHA Gift Requirements…create a paper trail.

HUD wants to make absolutely sure that gift funds are NOT from the seller, real estate agents, builder or anyone who has an interest in the transaction.   Although to the gift giver (donor) this seems invasive, the donor must prove that the funds they are giving are their own and they must sign a Gift Letter that includes the gift amount and that no repayment is required. 

If the gift funds are already in the home buyer’s account:

A copy of the canceled check (front and back) from the donor will be required along with a copy of the home buyer’s deposit slip or bank statement that shows the deposit.   If the donor is not able to provide a copy of the canceled check, they will need to provide other evidence that the funds were theirs (such as the bank statement showing the funds being withdrawn from their account).

If the funds are to be provided at closing to the escrow company:

When the gift funds are from a certified check, cashiers check or money order; the donor must provide a copy of the withdrawal document or canceled check, copy of the check and a copy of their bank statement showing the with drawl of funds.

If the donor borrowed the gift funds, they must provide evidence of where the funds came from and that they did not come from a party who has an interest in the transaction (seller, real estate agent, builder, etc.).

“Cash on hand” is never an acceptable form of gift funds.

Documentation and creating a paper trail is the key with gift funds.   Gift funds can go towards both the down payment and closing costs for an FHA buyer.  Seller contributions are limited to actual closing costs and prepaids (and cannot go towards down payment) after the buyer has met the minimum required investment (3% until December 31, 2008; then the minimum required investment is 3.5% for the buyer).

Gift funds are not limited by family members; employers and charitable organizations (as long as they are not funded by the seller after October 1, 2008) are also permitted to contribute gift funds with FHA financing.  Family members may include brothers, sisters, aunts, uncles–even close family friends as long as the relationship can be documented.

Gift donors may want to check with their Tax Advisor to make sure they avoid paying gift tax (currently $12,000 per parent/donor per child/family member).  For example, two parents (Mom and Dad) could gift $12,000 each for a total of $24,000 for to a child per year.  If the Bank of Mom and Dad want to gift to their daughter or son in law as well, the gift amount could go up to $48,000 without incurring gift tax.  (Again, always check with your CPA or tax advisor).   

If you’re considering FHA financing, check HUD’s site to make sure your lender is FHA approved–many are not.  Mortgage Master is a HUD approved Direct Endorsed FHA lender with FHA underwriters at our location.  Be sure to ask your Loan Originator how long they have been originating FHA loans.  I have been helping home owners with FHA financing for over eight years.   

Do you have questions about financing your home located in Washington State?  Please contact me.