The FHA requires at least a 3.5% down payment. This requirement comes with a condition. The funds must not originate from any type of loan, including an unsecured loan, such as a credit card. However, the FHA down payment does not have to be from the borrower’s own funds. Borrowers can receive a gift as long as the funds and the person gifting them meet certain requirements.
Who Can Give a Gift for the FHA Down Payment?
The FHA is rather choosy about who borrowers can receive a gift from for their FHA down payment. The borrower must have some type of relationship with the person gifting the funds. The most common is a blood relative or relative by marriage. However, other people in your life may be able to provide you with the funds. They include your employer, a close friend, or a charitable organization.
However, we must clarify close friend. You cannot just say John is your new best friend and is giving you the funds to buy a home. You must document the relationship and the reason the person is gifting the money. The reason is the FHA wants to make sure the person gifting the funds doesn’t have a vested interest in the sale of the home. This would fall under the list of people that cannot provide gift funds.
Who Cannot Give a Gift for the FHA Down Payment?
This brings us to the list of people that cannot give a gift for an FHA down payment. Basically, anyone with a vested interest in the sale of the home cannot help you with the purchase. This includes people like the seller, builder, and real estate agent. It also extends to anyone that has any type of association with the home and benefits from the proceeds.
How to Give the Gift
Now comes the tricky part. You can’t just accept funds from someone on the ‘approved list,’ from above. Instead, you must follow the strict requirements that the FHA requires in order for the funds to be used.
It all starts with a Gift Letter. This simple letter states that the person giving the funds gives them freely and without expectation of repayment. The letter must include the date, your name as the borrower, the donor’s name and address, and relationship to you.
The letter must also state the exact amount of money the donor is providing and for what purpose (buying a home). The letter should include the address of the home you are buying and the date of the funds transfer.
The donor should then sign and date the letter.
This letter starts the process. Next is the transfer of the funds.
Documenting the Funds Transfer
This is the hard part. You cannot miss a step in this process. The lender must track all funds. In other words, they want to know where the donor gets the funds and see where they go when gifted to the borrower.
The donor must show where the funds came from if it’s anywhere but their checking account. Let’s say the donor is cashing in some stocks to give the funds. The donor should provide the stock sale certificate and the canceled check for the check written to the borrower. The borrower should then copy the check and deposit it into the bank account he will use for the closing costs. The borrower should then provide the dated deposit ticket to the lender.
Under no circumstances can the donor just show up with cash funds, hand them to the borrower, and the borrower hold onto them. All funds must be sourced. If the funds are not ‘seasoned’ or in the donor’s account for at least 2 months, the lender may inquire about where the funds came from. Again, this is just to make sure the money is not some type of loan.
Why the Fuss Over Gifted Funds?
The FHA wants to make sure all gift funds are legitimately gifts. If they aren’t and it is a loan, it could affect your debt ratio. The FHA has loose guidelines regarding the debt ratio, but if the loan puts you over that amount, you may not be eligible for financing. In other words, the loan could put the mortgage at risk. If you are over extended, you may not be able to make your mortgage payments. This is the main reason the lender must be certain beyond a reasonable doubt that the funds are a gift.
Gift funds are possible for the FHA down payment. Just make sure you are very careful about how you receive them. If you ever have any questions, it’s best to ask the lender than take a chance. You don’t want to risk losing your FHA loan!