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More or less a hypothetical question but an interesting one: When someone is seeking a mortgage from a lender, the lender usually requires copies of bank statements for the last 2 or 3 months, and will often ask for an explanation and documentation for any deposit amounts over $100 (for example).
If a person had a sizeable deposit as a gift from a relative, and then spent that money to buy a specific thing (like a car), would the lender have the right to know what the money was spent for and documentation to prove what the money was spent for, or does the lender only have the right to know where the deposit came from (the relative's account)?
The lender ought to review bank statements to make sure there is no borrowed money entering into the transaction. If if were to turn out that some one else had a prior claim on money that was lent to you and you used that money as the down payment there are couple of problems -- the biggest one is that you do not really have "skin" in the deal and are much more likely to walk away; the second problem is that if the person that supplied you money for the down payment does not produce documentation that it was a gift, with no expectation of repayment, they might try to make an argument they really hold the most senior note on the property and it would make the lender second in line if there was a foreclosure...
If the money was spent the lender really won't care, though if the size of gift was larger than allowed by the IRs there might be tax consequences.
If a person had a sizeable deposit as a gift from a relative, and then spent that money to buy a specific thing (like a car), would the lender have the right to know what the money was spent for and documentation to prove what the money was spent for, or does the lender only have the right to know where the deposit came from (the relative's account)?
It's up to the lender what they choose to ask, but I've never, never had a lender question how I spent my money. They were only concerned about my sources of income and my debts / recurring obligations.
In the case I'm curious about, the money was a loan from a parent -- I've been told that the daughter did write "loan" on the deposit ticket for the funds, but there is no formal agreement of any kind. One of those "pay me back if and when you can" things.
The lender can and most likely will inquire on the large deposit. Doesn't reallly matter what the money was spent on. If they have any inkling that it was a loan they will require documentation (i.e. a copy of a note). Otherwise they will require a gift letter.
The lender will ask you to source any large deposits in your account, other than your payroll deposits. If you can't come up with a paper trail you will most likely have to write a lender of explanation. Just hope the underwriter buys your explanation(s).
All right, I have some more info on this. This is my cousin and her husband buying a house from a friend -- they borrowed "X thousand" from my aunt because the friend's house is up for foreclosure (job loss stuff), and they used the money to pay up the friend's mortgage so the house would not foreclose while they (my cousin) are looking for financing. Kind of risky, I think, but apparently the friend is a solid, honest person, so my cousin doesn't expect to lose on the deal. The amount now paid up on the arrears mortgage is being deducted from the price of the house, so my cousin and her hubby will have a somewhat lower mortgage loan.
Took a while for all the paperwork on the above to get done, so cousin now setting out to get financing. They have good credit and all. This loan from my aunt does not technically need to be repaid even though my cousin would prefer to do that.
Are there any pitfalls in this overall situation that would be of concern to a mortgage lender? I guess it might be a fairly common thing, just wondering about it.
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The lender can, theoretically, ask anything...
