The Down Payment Gift and the Paper Trail
Mei is arranging financing for first-time buyers Tom and Leah, purchasing a $650,000 home with 10% down ($65,000). They have $40,000 saved and plan to use a $25,000 gift from Leah's parents. The lender requires a gifted down payment letter, proof of the transfer, and confirmation the funds are not borrowed. Leah's father sends a signed letter stating the $25,000 is a gift with no repayment expected. However, the bank statement shows the $25,000 arrived in three transfers over six weeks from three different accounts, two of which are in the father's business name. Leah mentions privately that her parents 'might need some of it back next year.' The lender's fraud team flags the pattern. Mei's file is due in five days and the purchase closes in three weeks.
1. Identify the issues with the gift documentation and assess the risk to the file.
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Issues:
- Three transfers from three accounts, two business accounts. A single gift normally arrives as one transfer from the donor's personal account. Multiple transfers from business accounts suggest the funds may be business funds, a loan, or a repayment arrangement - any of which changes the analysis.
- The 'might need some of it back' comment. A gift with an expectation of repayment is not a gift; it is a loan. A loan must be disclosed and included in the debt-service calculation, which could break the qualification.
- Business-account sourcing raises questions about whether the funds are properly the father's to give, and whether the transfer creates a liability for the business.
Risk: The lender's fraud team has flagged the pattern. If Mei submits the letter as-is, she risks a misrepresentation finding, lender recourse, and discipline. The file may be declined outright if the sourcing is not resolved.
Assessment: The signed letter is not sufficient on its own; the transfer pattern contradicts the 'single gift' representation.
2. What should Mei do before submitting the file, and how should she handle the timing pressure?
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Mei should:
- Get a corrected, accurate gift letter that reflects reality - the actual source accounts, the donor's relationship, and an explicit statement that no repayment is expected and the funds are not borrowed.
- Obtain documentation for each transfer - statements showing the funds leaving each account, and confirmation the business accounts are the father's to draw on.
- Resolve the 'might need it back' issue directly with Leah and her father. If there is any repayment expectation, it must be disclosed as a loan and included in debt service. Mei cannot rely on a private comment and ignore it.
- Consider whether the funds should be re-sourced - e.g., the parents transfer from a personal account, or the buyers reduce the gift reliance.
- Communicate the timeline honestly - tell the buyers the file cannot close on the current documentation and set a realistic path. Do not submit a flagged file to 'buy time.'
Timing: Three weeks is tight but workable if the documentation is corrected promptly. Submitting a known problem to meet a deadline is the wrong trade.