Gift funds can be used by the borrower at settlement in all circumstances EXCEPT when

Gift funds are typically intended to help borrowers cover their down payment or closing costs without the obligation of repayment. However, there are specific circumstances that can limit the use of these funds.

In this case, when the gift letter indicates that the donor presently has an ownership interest in the property, it raises potential issues regarding the legitimacy of the gift. Lenders seek to ensure that the funds being provided do not come with a hidden obligation or expectation of repayment, which can complicate the transaction. If the donor has an ownership interest, it might be viewed as a form of equity or investment in the property rather than a true gift, which could influence the borrower’s financial obligations as dictated by the mortgage agreement. Consequently, using these funds in such a scenario might not align with lender guidelines.

In contrast, the size of the gift exceeding the down payment can still be considered under certain conditions, and a gift from a friend without a repayment plan can be acceptable if properly documented. Additionally, having the donor deposit funds in an escrow account with the settlement agent is often a standard procedure that ensures funds are available for settlement. Therefore, the key issue is the donor’s ownership interest, which alters how the funds are perceived in the context of the mortgage loan transaction.