Mortgage Connects an MGIC Podcast

All things "gift"

May 23, 2021 MGIC MI
Mortgage Connects an MGIC Podcast
All things "gift"
Show Notes Transcript Chapter Markers

In the mortgage world when we hear the word "gift," we think: A gift involves money. In this episode, Hali provides insight into some of the specific requirements around gift documentation, including who is eligible to give a gift. 

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Stephanie Budnik (00:02):
Welcome to Mortgage Connects by M G I C, bringing in the latest insights from top mortgage professionals around the industry. I'm your host, Stephanie Budnick, and today I will be talking to Hailey Pache. One of MG i's customer trainers. Today we'll be talking about all things gift related. When we hear the word gift, our mind instantly goes to a neatly wrapped package with an ice bow matching ribbon. Or maybe we think of someone that's naturally gifted, has a talent of some sort. But in the mortgage world, when we hear the word gift, all of that wrapping and that fancy stuff disappears. And we know that gift involves money or equity in some cases. We also know that there are specific requirements around documentation and who is eligible to give a gift. Haley, can you tell me what a gift is? Are there different types of gifts and how could someone obtain a gift?

Hailey Pache (00:54):
Sure. A gift is essentially money that's given to the borrower from an eligible donor without the expectation or requirement of repayment there. There are different types of gifts. We've got donated gifts or grants from non-profits and personal gifts, which can be monetary funds or there are gifts of equity. Oftentimes we see this in a first time home buyer situation with mom or dad or grandparents as the donor. But gifts are not limited to first time home buyers. So keep that in mind. They can be very useful tools. There are different ways to document the various types of gifts. For instance, if you receive a personal gift, a gift letters required, which would indicate the donor and relationship to the borrower, the gift letter must indicate the value of the gift. And it must also expressly state repayments is not required. A donated gift or grant on the other hand would be more likely to, uh, you'd probably see a formal acknowledgement from the donating non-profit organization.

Hailey Pache (02:01):
As an underwriter, I would expect to see the terms and the expectation that zero repayment of that grant or gift in the body of the acknowledgement. Now, as far as who can receive the gift, if there's a willing donor, anyone can receive a gift. So hold that thought though. I wanna be very clear here. The key component to whether a gift is allowed would be determined by property type and occupancy. So for example, a person purchasing a rental property or a V R B O or any type of investment property would not be eligible to receive a gift as a source of their down payment, closing costs, and you name it.

Stephanie Budnik (02:46):
Ok. You, you did mention a gift of equity. Can you tell me more about that and what that means and a little bit about how it's documented?

Hailey Pache (02:55):
Absolutely. As I mentioned earlier, the gift of equity falls underneath a personal gift category, and a gift of equity typically takes place in a purchase transaction where the property owner will gift a portion of their equity. So what does that mean in layman's terms? It's part of their net proceeds. So if they're selling, mom and dad are selling you the house they are giving up what their big check at the end of the day, at the end of the closing would be to gift that equity portion to the child or the recipient of that gift. The donor of the gift must be an eligible donor, and the transfer of it, of the gift itself is indicated on the closing disclosure and it must clearly state gift of equity.

Stephanie Budnik (03:44):
Ok, that makes sense. Besides the nonprofit, you also mentioned an eligible donor. Can you possibly expand on the term eligible donor and what that means or who would be eligible?

Hailey Pache (03:54):
Gift funds can be provided by any individual related to the borrower by these means, blood marriage, adoption, legal guardianship, a fiance or a domestic partner. Well, as I mentioned earlier, prior to the receipt of the gift, a gift letter needs to be in included in the loan documentation. Usually the gift letters can be found on the originating lenders loan origination system, or they're created specifically by the lender, including some of their specific required verbiage. To reiterate, the gift letter must include the date of the gift, the donor's name and relationship to the borrower, the donor's address and phone number, the amount of the gift, and of course, that repayment is not expected.

Stephanie Budnik (04:44):
Okay, and what would be the easiest way to document the transfer of gift funds once that gift is received?

Hailey Pache (04:51):
Well, let me ask you this. Would you rather climb the mountain or walk around it? I'm all about path of least resistance. So how difficult do you wanna make the gift transfer right off the bat? It's important for the lender to take control as soon as they find out that there's a gift and process or that there's a gift being utilized, They need to take control of that gift transfer and let those expectations be known up front as far as how they need to document that transfer, give 'em all the information. Okay. With a conventional loan, the easiest way to transfer the gift is at closing, no must no fuss. The money can be transferred via certified check with the donor as the remitter and payable to the borrower. The borrower would simply just bring the check to closing, endorse the back of it to the title company, and they're off.

Hailey Pache (05:43):
Now in today's world of technology, gifts are often wired. So this is something, um, not a, not so new, but check with your company as far as what their requirements are on a wire transfer of a, a gift, I'll give you a few pieces of information, but typically the closing disclosure would indicate that a gift was received via wire transfer or that title company will provide to the lender the terms of the receipt of that wire. They'll indicate the, the wire transfer, probably show you a copy of the wire and we'll see and can identify the donor's account, the amount of that gift. But again, check with your individual policies regarding using a wire and receiving wire gift funds. Remember, in the event of a gift of equity, it must be reflected on the closing disclosure. Most title companies are aware of this requirement, but just for your information, it must be reflected on the closing disclosure, specifically labeled Gift of equity.

Hailey Pache (06:49):
Now, back to the old, Climb Up the mountain or walk around it, a gift that will be given prior to closing. Just keep in mind the transfer must be documented. You need to see a copy of the check and including that deposit into the borrower's account. I often like to rip up a piece of paper like this because that's the purpose. We need to make sure that we see that money deposited. It's so easy just to show a picture of a check without the deposit. It can easily be disregarded, ripped up and whatnot. So copy of the check deposit into the account. Show me the updated balance after the gift has been deposited. And I think if you use your imagination just a little bit, you can see some of the various problems that may arise without clear and concise instructions to your customer.

Stephanie Budnik (07:40):
Yeah, it sounds, it kind of sounds like it. It sounds like gifts might be relatively easy to obtain, but there could be some complexity to it. So if borrowers have gifts, they should make sure this is something that's not up front to their lenders. Haley, thank you so much for your time today and thank you everyone for listening. For all of your latest insights, subscribe to Mortgage Connects on Apple's, Stitcher, or any other podcast source that you'd like or go to mortgage connects.com.

What is a gift? Are there different types of gifts? How can someone obtain a gift?
What is a gift of equity and how is it documented?
Who is an eligible donor?
What is the easiest way to document the transfer of gift funds?