While is possible for a relative to take out a loan to give you a gift for the down payment on a home, it can create a significant issue when you apply for a mortgage. The primary issue with this scenario is that any money you receive from another party to use for a down payment must be a gift and not a loan that the applicant is required to repay. If lenders see that the source of funds for a down payment is drawing down on a line of credit or taking out a loan this may create an issue even if the relative and not the actual applicant is responsible for the loan. In some cases the lender may classify the gift as a loan to the borrower which can make it challenging if not impossible to qualify for a mortgage.
Factors such as the borrower's and the gift giver's financial profile are also taken into consideration. If the relative has significant assets and income then the lender is more likely to allow the gift even if it comes from a loan taken out by the relative. In short, lenders want to verify that the relative makes enough money or has enough money in the bank to repay the loan he or she is taking out to give you the down payment gift.
In this situation the relative must be comfortable disclosing certain personal and financial information and documentation to the lender, which may not always be the case. The lender may request the gift provider's pay stubs, bank statements and other financial documents. The gift provider may push back on the document request by the lender reasoning that he or she is not applying for the mortgage. Although this perspective is sensible, the lender may not move forward without certain documentation from the gift provider.
One way to avoid this potential issue is to have your relative take out the loan and give you the money several months before you apply for a mortgage so that the funds appear on at least two months of your and your relative's bank statements. This is called seasoning the funds because the money is in your bank account for an extended period of time before you use it for your down payment.
You are also required to provide the lender a down payment gift letter that states that the money you received is truly a gift and not a loan. Please note that if you say that the funds used for a down payment are a gift when it is really a loan, this is mortgage fraud. We provide a comprehensive explanation of a down payment to buy a home including how to use a gift.
Given your unique circumstances, we recommend that you contact multiple lenders to understand their down payment gift documentation requirements and how they would handle a gift that comes from a loan taken out by a relative. We advise you to contact at least five lenders as down payment guidelines vary.
If lenders do not permit you to use the proceeds from a relative's loan or line of credit as a down payment gift, you should consider a no or low down payment program. We provide a comprehensive summary of no or low down payment mortgage programs. Borrowers can combine a low down payment mortgage program with a down payment grant or closing cost assistance program to buy a home with minimal personal financial contribution. We also provide a thorough explanation of Down Payment Grants and Closing Cost Assistance Programs for you to review. These programs help home buyers pay for all or part of their down payment and closing costs when you buy a home.