If there’s one thing that many buyers struggle with when they want to buy a home, it’s the down payment. Luckily, there are low down payment options, such as the FHA loan. With just 3.5% of the purchase price down on the home, you can buy a home with FHA financing.
What if you don’t have 3.5% of your own money though? Will the FHA allow the seller to ‘gift’ you the money?
Sellers and Gifting the Down Payment
The FHA is lenient with how buyers get their down payment. They allow relatives, employers, labor unions, charitable organizations, and even close friends to gift money for the down payment. These people can give as much as 100% of the amount necessary to put down on the home and the FHA will allow it to qualify as a down payment.
The one person that cannot contribute any money towards the down payment is the seller, though. The seller is known as an ‘interested party.’ In other words, the seller stands to gain something by you buying the home. If he were to gift you money for the down payment, it’s known as an inducement to purchase and the FHA frowns upon that.
The seller isn’t the only one that can’t give money for the down payment on an FHA loan. The real estate agent, builder, or any other person that is involved in the transaction cannot gift money for the down payment. They are all interested parties and stand to gain something from the sale of the home.
Getting Around the Down Payment Requirement
Even though it seems strict that sellers can’t help buyers with the FHA down payment, there are plenty of people that can help as we discussed above.
The FHA allows anyone that close to you, whether blood relative or otherwise (relationship must be documented) provide you with the funds as long as they follow the below guidelines:
- The donor must write a gift letter. This letter must state the amount of money the donor is providing, the address they are providing the funds for, and the reason for the gift. In that letter, there must be a clear statement proving that the funds are a gift and not a loan.
- The donor must be able to track the funds. The lender needs to see where the funds originated. They usually ask for two months of the donor’s bank statements first. If the funds were recently deposited, they are not seasoned. This will prompt the lender to ask for proof of the funds’ origination. Did the donor sell an asset to get the funds? Did the donor receive a tax refund or any other type of windfall? Proof of receipt of the funds will be proof enough for the lender that the funds belong to the donor and that they are not a loan of some sort.
- The recipient of the funds must document receipt of the funds. As soon as you receive the funds (via check), make a copy of the check. You must then deposit the funds in the account you will use to pay the closing costs and anything else related to the loan. Keep the deposit ticket and provide that along with the copy of the check to the lender. Some lenders may also ask the donor for a copy of the canceled check.
What Can the Seller Pay?
Aside from the down payment, the seller can pay just about anything else for you on an FHA loan. The seller is able to contribute up to 6% of the purchase price of the home as a seller concession. You can then use this money to help you pay any closing costs related to the loan. This may include discount points, appraisal fees, closing fees, or origination points. As long as the seller doesn’t contribute more than 6% of the sales price of the home, your loan amount remains unaffected.
The seller can be a crucial component of your ability to buy a home with FHA financing. Even though he/she cannot provide the down payment, sellers can help in other ways, which may help you have the money needed to make the 3.5% down payment.