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fha rules

FHA Gift Fund Rules on Down-Payments

By Joe Silver

Many potential home buyers often turn to FHA to get them into their first home, because of the low down-payment and flexible rules that allow gift funds when borrowers meet the FHA guidelines. FHA mortgages are backed by the US government so that if you were to not pay the mortgage, the FHA would reimburse the lender.

This is critical because it encourages lenders to extend loans to people who do not normally meet their criteria. For example, many people can get an FHA mortgage loan even though their credit score is well under 680. That type of credit score is usually the bare minimum to be considered for a conventional mortgage.

FHA house loans come with many benefits that we will describe later in this article, but one of the big advantages is regarding FHA down payments. With an FHA loan, you can put as little down as 3.5%. This amounts to only $7500 for a $200,000 loan. Having such small down payments brings home ownership within reach to millions of American.

Even better, you can if you choose, obtain your down payment funds from a family member or friend. That's right, you can get your entire down payment in the form of a gift, if you follow certain FHA loan rules and guidelines.

FHA Rules on Gift Money for Down Payments

FHA rules in HUD 4000.1 state certain guidelines for obtaining your down payment in gift funds. If you want to receive FHA gift funds from a family member or friend, you have to meet FHA acceptability standards.

For example, the rules state that the borrower may not use any proceeds from a non-collaterized loan, such as a credit card advance or a payday loan to make a down payment. Also, if the gift funds are for a down payment, the home buyer must not be required to pay the funds back.

HUD 4000.1 specifically states that 'gifts' for FHA loan down payments refer to cash or equity contributions that the person giving them has no expectation to get back.

It should be noted that equity can be given in the place of money. HUD 4000.1 states that gifts can be provided by the following people:

  • Your family member
  • Your employer or labor union
  • A close friend with a documented interest in you the borrower
  • A charity
  • A government agency or public entity that provides home buying assistance to people with low and moderate incomes

Careful documentation of the origin of the down payment funds is a very important part of the job of the underwriter and loan officer.

HUD 4000.1 states that if the gift funds for the FHA loan are verified in your account, the loan officer must obtain the bank statement of the donor showing that the money was withdrawn, as well as evidence of the fund deposit into your account.

If the gift funds have not been verified into your account, your loan officer has to get a check or money order or cashier's check that shows the wire transfer or any other official check. A bank statement also has to be obtained that shows the withdrawal from the account of the donor.

Thus, it is clear that you have to be able to show a very strong paper trail for any source of a financial gift that is related to your FHA loan. The HUD rules also state that regardless of when such gift funds are given to you the borrower, the lender has to make a reasonable effort to ensure that the gift funds did not come from an improper source.

FHA Gift Fund Letter

If you want to get a gift to pay for your down payment, you will have to get a gift letter from the donor. This is a letter that the donor writes to the mortgage company and makes it very explicit that the money is a gift rather than a loan.

The gift letter should state the following:

  • The name, address and phone number of the donor
  • The relationship to you the borrower
  • The amount of the gift
  • The month, date and year the funds were given to you
  • A statement that says you do not need to pay it back
  • The signature of the donor
  • The property address that is being purchased

As the above FHA rules state, the gift letter is needed in addition to providing the lender with a bank statement that shows the funds were taken from the donor's account and put into your.

All of your down payment can be from a gift; however, if your FICO score is from 580 to 619, you will need to put down at least 3.5% yourself. Also remember that they rules can change at any time, so it is a good idea for you to check with your lender or loan officer.

Bottom Line

The FHA loan is really one of the best options out there for buying a home with average credit and a low down payment. The fact that you can get all of your down payment from a gift is pretty amazing. You simply need to be sure to follow the rules that we provide above.

FHA and the US government want to encourage people to buy homes. But they also need to make sure that you the borrower can afford to pay the loan and are getting down payment funds from legitimate sources.

We always advise those with average to poor credit to consider FHA financing because of all of the advantages, including low down payments and gift funds.

 

FirstTimeHomeFinancing.com provides a news and information service by offering editorial content related to the housing and mortgage industry. FTHF has no affiliation FHA or any other government agency. This site does not guarantee FHA rules or gift-fund requirements by the FHA. This website is not responsible for the accuracy of information or responsible for the accuracy of the rates, APR or mortgage guidelines posted by advertising banks, lenders and brokers.

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