The $22,000 "Loan From a Friend"
A borrower is under contract on a $385,000 townhouse using an FHA loan with 3.5% down. He needs about $28,000 at closing: $13,475 minimum investment plus roughly $14,500 in closing costs. His statements show $19,000 that has been on deposit for eight months, plus a $22,000 deposit made 12 days before he applied. Asked about it, he says a friend lent it to him, that he will "pay him back whenever," and that he would rather not put anything in writing because the friend is private about money. The same friend is not a relative and is not on the loan. The borrower also wants $1,200 per month counted as rental income because he intends to rent the finished basement to a coworker, and he mentions that he will renovate for about six months first while continuing to live in his current apartment. The appraisal was ordered as owner-occupied. He asks you to "just leave the friend out of it - it's only a deposit."
1. How must the $22,000 be handled, and what does it do to qualification?
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It cannot be left out. A large, recent, unexplained deposit is a red flag, and the borrower's own description - repayment expected, lender is not a relative - makes it a loan, not a gift. Under FHA guidelines an acceptable gift source is limited to relatives, employers, labor unions, charitable organizations, and government agencies or similar public entities with homeownership programs. A non-relative friend does not qualify, so even a gift letter would not fix it. The stated intent to repay settles the question anyway.
Two outcomes are possible:
- Treated as a loan. The debt must be disclosed on the application, verified with a signed note, and included in DTI at the payment stated or, if no payment is stated, at a calculated payment. On $22,000 at 8% over 60 months, that is roughly $446 per month. On an FHA file already tight at $385,000, that payment can push the borrower over the investor's DTI limit on its own.
- Excluded from funds to close. If he does not use it, his $19,000 seasoned savings fall short of the roughly $28,000 needed, and the file does not close as structured.
What is not available is the option he asked for: ignoring the deposit. That would be a misrepresentation in the file regardless of good intentions.
2. Evaluate the basement rental income and the six-month renovation plan.
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Rental income: $0. Boarder or room-rental income on a principal residence requires a documented history of receipt, typically at least 12 months of the borrower actually collecting rent at that address. He has never lived there and has collected nothing. A stated intention to rent a basement to a coworker, with no lease, no history, and no evidence the space is legally rentable, cannot be counted. The $1,200 would also be netted for any costs, but there is nothing to net yet.
Occupancy: this is the more serious issue. FHA requires the borrower to occupy the property as his principal residence within 60 days of closing (or of completion for new construction). A plan to renovate for six months while remaining in his current apartment does not satisfy that. If the true plan is to keep the unit as an investment and rent it out, the loan is being originated on a false occupancy representation - that is occupancy fraud, not a documentation technicality.
The right move is a direct conversation: does he intend to move in within 60 days of closing? If yes, the renovation timeline has to change and he should understand that he is certifying occupancy. If no, the file must be restructured as an investment-property loan with the correct pricing, down payment, and reserves - or not done.
3. What obligations does the borrower's request create for you, and how should you handle escalation?
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You cannot comply with the request to omit the deposit, and you should not soften it into a paperwork annoyance. Three duties converge:
- Accuracy/fraud reporting. You cannot submit information you know or suspect to be false. If the borrower insists on a file you believe misrepresents the funds, occupancy, or the existence of the debt, escalate to your compliance or quality-control function, document what you were told and when, and decline to submit.
- Fair treatment of the applicant. He is entitled to a clear explanation of why the money cannot simply be ignored and what his legitimate alternatives are: qualify with the debt, find an acceptable donor, document additional seasoned funds, or restructure as an investment loan. Adverse action notice obligations attach if the file is declined.
- Confidentiality and no advice outside your role. Do not suggest that the friend "just sign a gift letter." That converts a documentation issue into a manufactured document.
Document the conversation in the file: the deposit amount and date, the borrower's description, the request to exclude it, what you explained, and the outcome. If a coworker's rent or the renovation timeline changes later, that too should be re-verified before closing, because the borrower's circumstances at closing are what the certifications speak to.