Why Must Gifts Be Documented?

May 7, 2001, Revised February 1, 2011

"We don't think we will have the 20% down payment necessary to avoid mortgage insurance, but we can get money from various family members. Are there any restrictions on getting cash from family members?"

Lenders have two major concerns regarding intra-family transfers. The first is that unacknowledged gifts from family members will be used to meet the entire down payment requirement. Lenders view loan applicants who have not been able to accumulate significant assets on their own as riskier than those who have. This leads them to impose restrictions on how large gifts can be relative to down payments. On conventional loans having down payments of less than 20% of property value, at least 5% of the down payment must come from the applicant's own funds. (There are some special programs for which the own-funds requirement is only 3%). The balance can come from a gift or a secured loan. With a 20% down payment, the entire amount can come from gifts or secured loans.

The second concern is that gifts are really unsecured loans from family members in disguise. Lenders fear that a borrower who gets into financial difficulties will give first priority to paying off the family member. To avoid this, family members have to sign a gift affidavit indicating that the money they gave you was truly a gift and that no repayment was expected.

Lenders do not allow gifts from home sellers because they assume, for good reason, that the "gift" will be offset by a corresponding increase in the sale price. Such payments are termed "seller contributions" and are limited to the payment of settlement costs. See Are House Seller Contributions Kosher?

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