FHA loans have a 3.5% down payment requirement, plus you must pay FHA loan closing costs. Luckily, the closing costs on FHA loans are often less than other loans. But, they still exist, meaning you still have to come up with money. What if you don’t have it? Luckily, you can use gift funds. However, you must follow a strict process.
What are Gift Funds?
First, let’s look at what the FHA constitutes as gift funds. Any money someone gives to you without any conditions or requirements for repayment is a gift. There must be no doubt that repayment is not required, though. The FHA usually verifies this through an official Gift Letter. The donor must write a letter stating the purpose of the money (purchase of a new home), the home’s address, the recipient’s name, the date, and that they do not expect any type of repayment.
Who Can Give Gift Funds?
Unfortunately, you cannot accept gift funds from just anyone. The easiest people to accept the funds from are blood relatives. However, the FHA does allow others to provide you with gifts. They include your labor union, employer, a long-time friend that you can document has a close relationship with you, a charity, or a government organization.
The FHA also determines who you cannot accept gift funds from for FHA loan closing costs. Anyone involved in the sale cannot help you with the closing costs. The most obvious is the seller and the real estate agent. They both have something to gain by the sale of the home and cannot help you. Other non-eligible parties include the builder and any other person that stands to make something off the sale of the home.
Verifying the Funds
If you accept gift funds for your FHA loan closing costs, you cannot just take the money and use it towards the costs. You have to document every step of receiving the funds. The first concern is what the FHA considers a ‘large deposit.’
Generally, the FHA requires lenders to go back 60 days on your asset statements. If during that time there are any large deposits, you will have to explain them. The FHA determines a large deposit to be anything larger than 25% of your monthly income. Let’s say you normally make $5,000 a month. If you have a deposit of $2,000 in the last 30 days, the lender will need to verify it.
Typically, the verification is just a Gift Letter. However, if you received the funds for something other than a gift, such as lottery winnings, an inheritance, or a tax refund, you will verify the deposit with a paper trail, which we discuss below.
Creating a Paper Trail
The most important thing you can do for your FHA loan is to create a paper trail for every deposit you make. Your paycheck deposits are easy to verify. Anything else, though, will require paperwork showing where the deposit originated.
Here are a few examples:
- You received a large tax refund and put it in your bank account. You can show the lender your tax returns as well as the refund voucher showing the refund from the IRS. If the amounts match exactly, you can use the funds for your FHA loan.
- You received a bonus check from your employer. Just show the lender the paystub for the check. The lender may also require a letter from your employer stating that they provided you with a bonus, the amount of the bonus, as well as the date they gave it to you.
- You sold stocks and made a profit. Keep a paper trail of the stock transactions as well as the deposit of the funds into your checking or savings account.
With any deposit no matter its origination, you’ll need the canceled check and the deposit ticket showing the deposit into your account. If you don’t get a deposit ticket or you don’t keep it, you’ll need your bank to complete a Verification of Deposit form.
Gift funds are a great way to cover your FHA loan closing costs. Just make sure you follow the rules regarding documenting the funds. Don’t assume just because the gift is small that you can get away with it. FHA lenders carefully evaluate any deposit. The FHA’s rule is any deposit over 25% of your monthly income, but lenders can require verification of any deposit. It is up to their discretion. The larger the paper trail, the easier it will be to use the gift funds.