Cash Gift From Parents Can't Be Used for Investment Purchase?

[Brandon Hall]

Hey Folks,

I'm in the market for my first property (investment and otherwise) and was on the phone with a loan officer earlier today. The original plan was that my parents would match my cash contribution and classify it as a gift for tax purposes. The loan officer informed me that if my parents gifted me money, I would not be allowed to use that money for the purchase of an investment home. A personal residence yes, but not an investment home.

I am trying to understand why (and if) this is true. In my mind, if I get qualified based on my personal assets for a certain loan amount, why couldn't my parents come in on top of that and gift me money to use toward the purchase? Why would that have any effect on the loan qualification?

Additionally, he said even if my parents loaned me the money and there was supporting documentation, I would not be allowed to use it for the home purchase. 

I'm pretty confused and I am hoping for creative solutions to the problem. I have a call again later this week and I want to have smart questions to ask him. 

One thing I thought about was forming an LLC and having my parents contribute to that LLC. Would that be an option?

I'd like to understand how other people are able to obtain private money and legally purchase properties with it. Thanks!!

[Bill Gulley]

Albert gives good advice basically, but let's not go with 2 banking statements, 2 months, xx days or the like. such isn't standardized to all lenders. 

Most originators/lenders will ask for the last two or three months of bank statements. You have another issue on deposit inquires asking for the average balance, you can look to average balances and then see a jump in the account, they may look back 6 months or a year.

Secondary requirements are based on large pools of loan losses and problem loans, areas of similarity become identified as areas of concern, they set guidelines and are also securitized requirements to the investors buying those loans as being compliant. If they see that 120,000 Mikes got money from mom and dad and went belly up later on, then that is an indication that money from mom and dad is a factor in making a bad loan. Investors usually don't want bad loans......I saw usually now, post 2008.

There is another issue, money laundering, much less tax evasion, the last thing a lender wants is to loan money and then have a borrower zapped for financial fraud, evasion, laundering, undeclared earnings, quiet business transaction like dealing drugs, so rules and guidelines are there for a reason. Audit trails are set to discover such activities.

The other issue is folks getting "gift funds" mixed up with a "gift", nothing wrong with a gift given to you and explained as opposed a gift to buy a property, strings are attached, the gift is for this use. It also is a reflection on your ability to manage, your motivation will be higher if you earned the money than if mommy and daddy write checks for you....in that, put mom and dad on title.

You could buy with your parents and later they can deed their interest to you under the guise or real aspects of estate planning, you're related, no due on sale or abandonment of interests issues, done all the time.

Have you parents do the same as members in the LLC, they can be removed later.

Folks that use underwriting guidelines or rules of some lenders are usually not aware of the backroom audits accomplished after closing and then usually again within one year. Those verifications you sign aren't based on a one time shot, they can be used later on to re-verify the representations made by a borrower, so I suggest you ask the bank how you can rather than taking loophole suggestions.

When you say gift money, that is attached to that purchase, so don't use gift money, partner or sell something or receive an estate distribution and season those funds for 90 days so that it isn't obvious that the funds were to buy property two months or two weeks later. It also shows that the person gifting had no knowledge of a specific property. Your large cash transaction report that may be generated by your bank for the deposit of the gift will fall out of concern after 90 days as well.

If you're not in a hurry, dribble funds into your account, $500, 900, at a time for deposits, may not even trip a large cash transaction report. Not that you need to be concerned about the report but it is an audit trail if you do pull suspicious activities trying to out smart the system.

A rental can be booked as a commercial real estate loan by a small lender, there can be exceptions made under compensating factors in underwriting. 

Boils down to giving full disclosure in you loan application and not getting nailed for mortgage fraud, the bank wants to make a loan if they can, so inform and work with them, don't try to out smart them. As mentioned, talk to smaller lenders there can be a big difference between what they can do, will do or can't do,