The FHA (Federal Housing Administration) is the easiest path to homeownership. The seller is allowed to pay up to 6% of the sales price toward the home-buyer's closing costs and prepaid expenses (i.e. homeowner's insurance, property tax escrow, etc.); and the down payment is only 3.5%. But what if you can't afford the down payment and other costs?
The FHA guidelines permit an eligible donor to "gift" some or all of the home-buying expenses, including the down payment.
Who can gift funds for an FHA loan?
Eligible contributors include:
- relative of the borrower (i.e. mother, father, brother, sister, etc.)
- the labor union or employer of the borrower
- a close acquaintance who has a specific and proven stake in the borrower
- a philanthropic institution (i.e. church, non-profit organization)
- a governmental body or public organization that funds a homeownership aid program for low- and moderate-income families or first-time house purchasers
To be deemed a gift, there must be no implicit or anticipated return of the gift money to the giver by the borrower (s).
In other words, there are no loans between the giver and the borrower.
The donor (s) may borrow gift money from an authorized source as long as the FHA applicants are not committed to any loan that secures money for the gift.
An example would be parents or grandparents getting a personal or secured loan and then gifting it to the FHA applicant.
FHA gift letter requirements
The lender is required by the FHA to document any gift funds with a gift letter, that is signed by the borrower and donor. The gift letter must:
- provide the donor's name, address, and phone number, and
- The monetary value of the present must be stated, as well as
- The donor must explain the donor's connection to the borrower, as well as the fact that no payback is needed.
The FHA demands meticulous paperwork about the transfer of funds from the donor to the borrower (s). DO NOT TRANSFER ANY MONEY UNTIL YOU HAVE CONNECTED WITH THE LOAN OFFICER PRIOR TO THE GIFT MONEY TRANSFER.
The following are the transfer requirements directly from the FHA underwriting standards.
FHA gift letter.pdf
|If the gift funds ...||Then the lender must ...|
|are in the borrower's account||Obtain a copy of the withdrawal paperwork demonstrating that the withdrawal was made from the donor's account, as well as a copy of the borrower's deposit slip and bank statement demonstrating the deposit.|
|are to be provided at closing, and are in the form of a certified check from the|
|Obtain a copy of the certified check as well as a bank statement indicating the withdrawal from the donor's account.|
|are to be provided at closing, and are in the form of a cashier’s check, money order, official check, or other type of bank check|| |
Request that the donor produce withdrawal paperwork or a cancelled check for the amount of the donation, demonstrating that the money was drawn from the donor's own account.
|are to be provided at closing, and are in the form of an electronic wire transfer to the closing agent||Request that the donor produce proof of the wire transfer.|
Note: The lender must acquire and maintain the wire transfer paperwork in its mortgage loan application binder.
While the document is not required to be included in the insurance binder, it must be accessible for examination by FHA's Quality Assurance Division (QAD) during the onsite assessment.
|are being borrowed by the donor, and documentation from the bank or other savings account is not available||Request that the donor produce written proof that the money was borrowed from an appropriate source, rather than from a party to the transaction, such as the lender.|
It is critical to note that cash on hand is not an eligible source of donor gift money.