House prices are constantly rising, making it more and more difficult for first-time buyers to get a foot on the housing ladder. One of the biggest hurdles to overcome is saving for a deposit. One of the options to help first-time buyers get a mortgage is a gifted deposit. While this is a viable option, it’s important to do everything correctly to ensure a gifted deposit is acceptable in the eyes of lenders.
If you intend to use a gifted deposit to obtain a mortgage, lenders and solicitors are required by law to confirm that the gifted deposit is credible. A gifted deposit can come from a family member’s savings, but not from a third-party loan. Any deposit that is a loan, rather than a gift, will be a significant red flag for the vast majority of lenders.
What is a gifted deposit?
A gifted mortgage deposit means that all or part of your deposit is given to you by someone else. It can come from a family member or a friend, though some lenders prefer it when gifted deposits come from family members. If you are given the money for a deposit in the form of a loan, this does not count as a gift. If you are required to repay the deposit at any point in the future, it still doesn’t constitute a gift as this is still a loan.
There must be a clear paper trail for the gifted funds. Lenders and solicitors need to be able to see clearly that the money has come from a legitimate source. This is to ensure compliance with anti-money laundering regulations and it is a legal requirement.
If the origins of the money are not completely clear, your mortgage offer may be halted and there could be delays in the completion of your property purchase. Beyond that, it could even mean your mortgage application is declined altogether. It’s essential that you collate the right evidence to ensure lenders can clearly see that your deposit was given to you as a gift. Think Plutus can help you gather the necessary evidence to get this right.
Getting a mortgage with a gifted deposit
These simple steps will ensure you approach your mortgage in the right way to get approved.
Proving your deposit is a gift
Providing evidence that your deposit was gifted is the first step in securing a mortgage with a gifted deposit. It can be as simple as presenting a signed letter confirming that the deposit is a gift rather than a loan. The signed document needs to state clearly that the deposit isn’t a loan and there is no expectation for it to be paid back. Additionally, it needs to state that the gift of a deposit doesn’t entitle your family member/friend to any rights to the property. Think Plutus can supply a template for this document if you are uncertain about getting it right.
The evidence of the gifted deposit must be in writing. The family member or friend involved should include the following in the letter:
- The amount of money being gifted as a deposit
- The deposit is a gift to help you get a mortgage
- A clear statement that the money is a gift and there is no expectation of repayment
- The gifting family member/friend will have no rights to the property
- Include the lender’s name and state that the gift has no bearing on the security for the mortgage
- Include the address of the property being purchased
- Mention that the gift does not constitute any financial agreement
- The source of the gift is legitimate, ie. savings
- Your family member/friend is in an adequate financial position to provide the gift
Sign and date the document and include a signature and date from a witness.
Proof of documents
The provider of the gift of the mortgage deposit will be required to submit personal documents for the application. This will include a photo ID, such as a passport or driving licence, and proof of address, like a utility bill or bank statement. There are lenders and solicitors who will require bank statements to be submitted in order to check the source of the funds and how they were acquired.
Your family member or friend must supply these documents as part of the regulations around anti-money laundering.
What if I’m expected to pay the deposit money back?
If your family member or friend needs you to pay the deposit money back at any point, it is a loan rather than a gift. If you’ve been given the deposit money in the form of a loan, it’s likely you will be rejected by virtually any lender. This is because, since the deposit is a loan, it will be counted as an outstanding debt against you.
When lenders do the calculations for a mortgage application, they will work out everything that you currently owe. This will include things like items bought using finance and unpaid credit card bills. If you receive the deposit in the form of a loan, it doesn’t really help your mortgage application at all. Having said that, there may be a handful of lenders that will still consider your application. It will depend on the rest of your circumstances and the amount of the mortgage you are applying for.
Bear in mind that, if your deposit is a loan, the implication is that your family member or friend has some security in the property. This is a real problem for lenders because they need to be certain that the funds they provide are secure. Where other interested parties are involved, the lender’s position can be compromised.
Can I use a guarantor rather than a gifted deposit?
It may be more prudent for your family member or friend to act as a guarantor rather than gifting you a deposit. This will mean your family member/friend is a guarantee for the lender. There is no gifted deposit, but lenders can approach your guarantor in the event that you fall behind with mortgage repayments.
Specialists in first-time buyer mortgages
Think Plutus specialise in securing mortgages for first-time buyers. If you are applying with a gifted deposit, we can ensure you present all the evidence in the right manner. There is considerable variation between lenders regarding who they’ll lend to and the amount they will offer. Just because you’re declined by one lender, doesn’t mean you won’t be approved by another.
Getting good advice can be crucial for first-time buyers, and Think Plutus is just a phone call away.