I think you should go with purple's wording to make it clear that the $5000. isn't on the table anymore.
Why would she need to deposit the check in her account then give it to her mother to give to her? That part makes no sense to me.
This friendship may be over either way. If you give the money and don't get paid back you'll end it. If you don't give the money she may be very angry and end it. I am sorry you are in this position.
That is a very good question. When I was getting a mortgage at the end of last year, I had to hand over bank statements and account for any significant amount, which this would certainly be!
What I think.....
Friends mom will be doing the "gifting" on paper. Friend may or may not use her bank account maybe she'll decide to deposit it in her moms account. IF the $5,000 goes in and out and is not counted as assists it may not make a difference to the lender.
Why the lender wants it to be a gift and not a loan....
1) most importantly a loan toward any portion of down payment may create a "lender with claim on the home"
2) they want the borrower to actually have a downpayment. AS it looks like they are willing to take the gift from her mom this is a non issue ethically IMHO
3) the loan repayment will not be counted in her income to payment ratio. It depends on the payment reschedule how much this will effect the ratio so it may be a big issue or not an issue at all.
lenders don't tend to mind "wink wink" loans from mom as long as mom is willing to officially assign it as a gift. Mom has no , zero nadda legal redress if the loan goes unpaid. The lender doesnt care if you pay mom back or stiff her. Lenders normally check the accounts of the gifter too , to make sure they have the money to give and that they didn't borrow it. **People who lend money can in general try to take back what you bought with borrowed funds for a short amount of time, even credit cards or personal loans even if you file bankruptcy. Its not easy its not normally worth pursuing but the theory applies. I don't mean this as legal advise just explaining the lenders position** Lenders don't like gifts from friends , they don't have plausible dependability to claim "we did not know it was a loan" IF you're a billionaire you can give someone $20,000 for a down payment but the don't buy "Mrs Smith who earns $60,000 a year gave her pal Sue $5,000 no strings attached" . Charities can give gifts as down payments , you can use lottery winnings, you can sell your baseball card collection etc , you just can't borrow it from an unapproved source.
I wouldn't like my friend being caggy about telling me what they were planing. I would be very concerned about the payment schedule, houses always have unexpected expenses. $5,000 is a lot of money , how long will it take her to pay you back ? is that set? $100 would take more then 4 years if she plans on paying it faster then why does she need the loan( this is based on the common occurrence that buying a home increases a person minimum monthly expenses if she plans on paying you $250 a month and her bills with be $250-500 a month more , why didn't she save up the $5,000)