There’s a thin line between a cash gift and loan fraud.

HSH.com contributing writer Marcie Geffner explains how to walk that thin line safely in her latest article for HSH titled, “Is it a gift or mortgage fraud“:

If you’re ready to buy a house, but don’t have enough cash to make a down payment and cover your closing costs, you might want to ask your parents or other family members to make up the difference with a monetary gift.

A genuine gift, meaning no repayment is expected or implied, can help you qualify for a mortgage. But a “gift” that is really a loan in disguise could be problematic or even considered loan fraud, a federal crime with serious consequences.

That distinction, between a genuine gift and loan fraud, is precisely why lenders require a so-called “gift letter” to document that any gift you get is in fact genuine.

This type of letter simply states that the money is “a bona fide gift that will never have to be repaid,” says Joe Metzler, a mortgage specialist at Mortgages Unlimited in St. Paul, Minn.

What a gift letter says

Typically no longer than a page, a standard gift letter states the amount of the gift, the source of gift-giver’s funds and the relationship between the two of you, Metzler explains. Statements that the gift will be applied to your home purchase, you are not expected to repay the gift, and the money wasn’t obtained behind the scenes from the seller, loan officer, real estate broker or anyone else associated with the transaction are also typical components.

Both the gift-giver and you, the recipient, will have to sign the gift letter. Signatures do not need to be notarized.

You will also need documentation to back up the gift letter, according to Peter Thompson, a senior loan officer at Prospect Mortgage in Naperville, Ill.

“The gift letter by itself isn’t enough,” Thompson says.

To read the rest of Marcie’s article, be sure to visit HSH.com.

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