The biggest issue confronting prospective home buyers is the money needed to buy a home or even start paying for that home. Down payments required by commercial lenders tend to be higher and have the effect of leaving interested home buyers out in the cold. On the contrary, an FHA down payment is set low because it is aimed at people with low to moderate incomes and not-so-great credit histories.
Down payments under FHA loans could go as low as 3.5 percent of the purchase price and as high as 10 percent, depending on a borrower’s credit record.
An even more attractive option is getting an FHA loan without paying for a down payment. This is through a gift fund, a mechanism that allows donors to shoulder the down payment costs on behalf of the borrowers, subject to the FHA’s guidelines. Scroll down to find out more.
Breaking Down FHA Down Payment Scheme
For starters, the FHA or Federal Housing Administration insures mortgage loans, basically paying out a claim to the lenders in the event of a borrower’s default and thus encouraging lenders to provide loans at affordable rates and relaxed requirements.
A quintessential feature of any FHA loan is its down payment scheme. The FHA requires a borrower to come up with a minimum down payment of at least 3.5% of the purchase price.
The borrower must also possess sufficient funds for the closing costs and fees. These funds needed to pay the required minimum down payment and the attendant closing costs and fees must come from acceptable sources. They include:
- Gift funds
- Savings and checking accounts
- Earnest money deposit
- Cash accumulated with private savings club
- Cash saved at home
- Savings bonds
- Stocks and Bonds
- 401(k) and Keogh accounts
- Thrift Savings Plans
- Sales of personal property
- Sales proceeds
- Commissions from sale
- Rent Credit
- Trade equity
- Collateralized loans
- Sweat Equity
- Grants and loans
- Employer Assistance Plans
- Employer’s Guarantee Plans
Take note that the FHA allows borrowers to receive gifts as an acceptable source of borrower funds.
FHA Gift Fund Guidelines
1. What Are Gift Funds and Who May Give Them
For gift funds to be accepted as “gift funds”, there should no repayment, whether implied or expected, of such funds by the borrower to the donor pursuant to Chapter 5, Section B of the HUD Handbook 4155.1. In short, they should not be repaid.
Gift funds may cover 100% of the down payment and closing cost requirements of the purchase transaction. Notably, the gift fund’s portion that is not used to cover closing costs may be included in the reserves.
These persons or entities are allowed to provide a gift fund to borrowers:
- A relative of the borrower
- A borrower’s close friend whose interest in the borrower is clearly documented and defined
- A labor union or employer of the borrower
- a public entity or a government agency that offers a home ownership assistance program for first-time home buyers or families with low and moderate incomes.
- A charitable organization
However, these persons or entities that are involved or have interest in the sale transaction are not considered as gift donors:
- the seller,
- the builder,
- the real estate agent or broker, or
- an associated entity.
Gifts from those entities are considered “inducements to purchase” and will have to be subtracted from the purchase price.
Donors can borrow gift funds from other acceptable sources, provided that the borrowers should not be named obligors to notes that secure monies being borrowed for the gift funds.
2. Gift Fund Verification and Documentation
For their part, lenders are required to determine and verify that the gift funds were (i) from an acceptable source and (ii) the donor’s own funds.
The lender shall document any gift funds through a gift letter duly signed by the donor and borrower. The gift letter must state:
- The name, address and telephone number of the donor;
- The specific dollar amount of the gift;
- The relationship between the donor and the borrower; and
- That no repayment is required.
In the event the donor borrowed the funding for the gift funds and cannot present documentation from the relevant bank or savings account, the lender shall require the donor to provide written evidence that the funds were borrowed from an FHA-accepted source.
The lender must also document the transfer of gift funds from the donor to the borrower.
Cash on hand, according to the guidelines, is not deemed an acceptable source of donor gift funding.
Talk to a Lender
The FHA’s gift funds option eases out a fundamental hurdle that has been stopping most people from getting their own homes. It is a great help for home buyers in addition to the agency’s existing down payment assistance program as extensively discussed here.
If you want to take advantage of these features presented by the FHA loans, feel free to consult with an FHA-approved lender or specialist to know more about your options.