FHA Gift Funds Guidelines
FHA home loans have a minimum down payment requirement of 3.5%. FHA Guidelines also permit those funds to be gifted to the borrower from an approved source such as a relative or close friend.
The down payment used for an FHA loan cannot come from another loan or a source where the down payment needs to be repaid (ie another loan or credit card advances).
FHA Guidelines are clearly detailed in HUD 4155.1 Chapter Five Section B where it says there should not be a required or implied repayment of the FHA gift funds.
How do FHA Down Payment Gift Funds Work?
The FHA down payment gift fund donor writes a short gift letter indicating that he or she would like to “gift” an amount to be used towards the purchase of your home. The letter must clearly state that there is no repayment required.
Next, the donor provides you with the gift amount and that needs to be deposited into your bank account prior to getting the approval to close the loan. The lender may be required to ask for proof showing the withdrawal from the donor’s account, then the deposit into the borrower’s account.
Where Can I Find an FHA Gift Letter?
Your FHA lender can provide you with a blank FHA gift letter. Just complete the short form and we will put you in touch with an FHA lender who can provide you with the sample gift letter and also a great FHA rate quote.
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What can the FHA Gift Funds be Used for?
The gift funds can be used to cover the down payment, FHA closing costs, or even the reserves needed for approval. If the gift is large enough, it could cover all of those items referenced above.
Approved Sources of FHA Gift Funds
The chapter 5 section of HUD 4155.1 says the following gift donors are approved sources for FHA gift funds:
- A relative
- A close friend
- The borrower’s employer or labor union
- A charitable organization without tax exempt status
- A government agency or public entity that has a program providing home ownership assistance to low- and moderate-income families, or first-time home buyers.
Unapproved Sources of FHA Gift Funds
The FHA gift funds donor may not be a person or entity with an interest in the sale of the property, such as
- The seller of the property
- The real estate agent or broker
- The lender
- The builder
- Any associated entity related to the real estate transaction
If a gift is received from any of the sources referenced above, they are considered “inducements to purchase” and must be subtracted from the sales price.
FHA Gift Funds Summary
For many borrowers with limited funds for a down payment, gift funds are a great way to help purchase the home. This is a common practice and virtually all FHA lenders accept gift funds per the FHA guidelines.
It is important to be sure the donor has agreed to provide you withe the gift prior to going out on your home search. If you are thinking about buying a home, take a close look at your finances to determine whether you have enough for the minimum FHA down payment of 3.5%. If not, then it would be wise to begin checking with your relatives for a possible gift.
What is a Gift of equity?
A gift of equity is when a family member sells you their home but gives you a discount on the purchase or a gift of equity. This is entirely different than when a relative offers you gift funds to buy from a 3rd party.
In a gift of equity transaction, the family member who is selling the home sells at the market rate. Then, the gift of equity portion is taken into consideration during the transaction and is counted as a down payment credit.
Gift of Equity Example
Purchase price = $200,000
Gift of Equity 3.5% down payment $7,000
FHA Loan Amount = $193,000
*A Gift of Equity can only come from family members
Can FHA closing costs be gifted?
Gift funds can be used for closing costs as long as the donor and the funds meet FHA guidelines. If the gift is large enough to cover the down payment and some or all of the closing costs, then the gift may be used.
FHA Loan Information – Learn everything you need to know about applying for an FHA loan
FHA Loan With No Money Down – You may be able to get an FHA loan without any out of pocket funds
FHA Down Payment Assistance Programs – There are various down payment assistance programs available in each state.
5 Guidelines for Home Buyers Using Gift Funds – This article details the various gift funds guidelines regardless as to whether you are using an FHA loan.
HUD 4155.1 Chapter 5 – Details regarding gift funds