What is the number one mistake Texas buyers make with gift money?
The biggest and most common mistake Texas homebuyers make is depositing a large sum of gifted money into their bank account without the proper documentation. It seems like a simple, logical step, but to a mortgage underwriter, a large, unexplained deposit is a major red flag. Lenders operate under strict federal guidelines, including the Bank Secrecy Act, designed to prevent money laundering and undisclosed debt.
Here’s a typical scenario that causes delays:
- Your parents generously write you a check for $20,000 for your down payment.
- You deposit the check into your savings account a few weeks before applying for a mortgage.
- During underwriting, the lender reviews your last two months of bank statements and sees the $20,000 deposit.
Without a clear paper trail, the underwriter has no way of knowing if this money is a true gift or an undocumented loan you are expected to repay. An undisclosed loan would alter your debt-to-income (DTI) ratio and could impact your ability to qualify for the mortgage. This forces the underwriter to halt the process and request a full accounting of the funds, delaying your closing.
The takeaway: Never move gift funds around without first speaking to your loan officer about the correct procedure. A simple phone call can prevent weeks of stress and delays.
Why does the lender need to see my family member's bank statements?
Requesting bank statements from a gift donor often feels invasive, but it’s a standard and non-negotiable part of the mortgage underwriting process. The lender isn’t judging your family member’s financial habits; they are performing a crucial task called sourcing the funds.
Lenders must legally verify two things:
- The Donor’s Ability to Give: They need to see that the donor had the funds available in their account to give. This proves the money is legitimate and wasn’t sourced from an unacceptable origin, like a cash advance, a personal loan, or another mortgage.
- The Transfer of Funds: They need to create a clear paper trail. This involves matching the withdrawal from the donor’s account to the deposit into your account. A clean paper trail shows the money moving from Point A (donor) to Point B (buyer) without any mysterious stops in between.
Typically, the lender will ask for one to two months of the donor’s bank statements. The donor can black out account numbers (except for the last four digits) and other sensitive information not relevant to the gift transaction. What’s critical is showing their name, the bank’s name, the statement period, and the transaction leaving their account.
What is a gift letter and what specific information must it include?
A gift letter is a signed, formal document that clarifies the details of the financial gift. It’s a sworn statement that the money is not a loan and that there is no expectation of repayment, ever. Every mortgage program, from FHA to Conventional, requires a meticulously completed gift letter if the funds are not 'seasoned'.
To be considered valid by an underwriter, the gift letter absolutely must include the following details:
- Donor Information: The donor’s full legal name, home address, and phone number.
- Borrower Information: Your full legal name (and the name of any co-borrowers).
- Relationship: The donor’s relationship to you (e.g., 'Mother', 'Father', 'Brother').
- Gift Amount: The exact dollar amount of the gift (e.g., '$15,000.00').
- Transfer Date: The date the funds were transferred to you.
- Property Address: The full address of the home you are purchasing.
- The Magic Phrase: A clear and unambiguous statement that the funds are a gift and there is no expectation of repayment. This is the most important part of the letter.
- Signatures: The letter must be signed and dated by both the donor and you, the borrower.
Your loan officer will provide you with a specific template to use. Do not create your own or deviate from the provided format, as underwriters look for specific language and structure.
How does 'seasoning' the funds in my own account solve this problem?
'Seasoning' funds is the most effective way to avoid the entire gift documentation process, but it requires advance planning. The term refers to letting the gift money sit in your bank account for a specific period, typically 60 days or longer, which covers two full bank statement cycles.
Here’s how it works: Once the money has been in your account for that long, lenders no longer consider it a recent deposit that needs sourcing. It is treated as your own asset, just like your regular income or savings. When you provide your two most recent bank statements to the underwriter, the seasoned gift money will already be there as part of your established balance.
Pros of Seasoning Funds:
- No Gift Letter: You don't need to complete a gift letter.
- No Donor Statements: Your family member does not have to provide their personal bank statements.
- Simpler Underwriting: It removes a potential source of questions and delays from the underwriting process.
Cons of Seasoning Funds:
- Requires Time: You must plan at least three months ahead of your mortgage application to allow the funds to season properly.
- Not an Option for Last-Minute Gifts: If you receive a gift right before you make an offer on a house, seasoning is not a viable strategy.
Are the rules different for FHA vs. Conventional loans regarding gift funds?
Yes, the rules for who can provide a gift differ significantly between FHA and Conventional loans. While the core documentation requirements (gift letter, paper trail) are similar, the list of eligible donors is not.
FHA Loan Gift Fund Rules
FHA loans, insured by the Federal Housing Administration, are generally more flexible regarding who can give you money for a down payment. An acceptable FHA gift donor can be:
- A family member (as defined by HUD, which is broad).
- An employer or labor union.
- A close friend with a clearly defined and documented interest in the borrower.
- A charitable organization.
- A government agency or public entity providing homeownership assistance.
Importantly, the donor cannot be anyone with a vested interest in the sale of the property, such as the seller, the real estate agent, or the builder.
Conventional Loan Gift Fund Rules
Conventional loans, which conform to the guidelines set by Fannie Mae and Freddie Mac, are much stricter. For a Conventional loan, the gift donor must be a family member. Fannie Mae defines a family member as a spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship. A fiancé, fiancée, or domestic partner is also permitted.
Unlike FHA loans, a gift from a 'close friend' is generally not allowed for a Conventional mortgage. If you plan to use a Conventional loan and receive a gift from a non-relative, the funds will likely need to be seasoned first.
What happens if the person gifting me the money is a non-relative?
This depends entirely on your loan type. As mentioned above, if you have a Conventional loan, a gift from a non-relative is not permitted. The underwriter will reject the funds unless they have been seasoned in your account for over 60 days.
If you have an FHA loan, you can accept a gift from a non-relative, but only if they qualify as a 'close friend with a clearly defined and documented interest in the borrower'. This is a subjective standard, and you will need to provide a compelling Letter of Explanation (LOX) to the underwriter. For example, a godparent who has been involved in your life since childhood may be an acceptable donor, but a casual friend or coworker would not be. The documentation must be perfect to prove the legitimacy of the relationship and the gift.
How can I fix gift fund documentation errors that an underwriter has already flagged?
Receiving a notification from an underwriter that there’s a problem with your gift funds can be stressful, but it's usually fixable. You need to act quickly and precisely. Follow these steps:
- Communicate with Your Loan Officer Immediately: Don't guess what the underwriter needs. Ask your loan officer to explain the exact issue. Is the gift letter missing information? Is the paper trail unclear? They will tell you precisely what documentation is required.
- Correct the Paperwork: If the gift letter was filled out incorrectly, get a new, corrected version from your donor immediately. Ensure all fields are complete and it's signed and dated.
- Provide the Complete Paper Trail: The most common issue is a broken paper trail. To fix this, you need to provide two documents: the donor’s bank statement showing the money leaving their account, and your bank statement showing the same amount being deposited. The amounts and dates should align perfectly.
- Write a Letter of Explanation (LOX): A LOX is a simple, direct letter you write to the underwriter. In it, you should clearly state the source of the large deposit. For example: 'The $20,000 deposit into my savings account on May 15, 2024, was a gift from my mother, Jane Doe, for the down payment on the property at 123 Main Street. Attached are the gift letter and relevant bank statements.'
By providing clear, complete, and prompt documentation, you can resolve the underwriter's concerns and get your loan back on track toward closing.
Ready to navigate the Texas mortgage process with confidence? Using gift funds is manageable with the right guidance. Apply now to get personalized support and ensure your home buying journey is smooth from the start.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.
References
Fannie Mae Selling Guide: B3-4.3-04, Personal Gifts
