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FHA guidelines for gift funds

FHA gift funds donorsThe 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:

  • the borrower's relative (i.e. mother, father, brother, sister, etc.)
  • the borrower's labor union or employer
  • a close friend with a clearly defined and documented interest in the borrower
  • a charitable organization (i.e. church, non-profit organization)
  • a governmental agency or public entity that has a funding program that provides homeownership assistance to low- and moderate-income families, or first-time home buyers

There must be no implied or expected repayment of the gift funds to the donor by the borrower(s) in order for the money to be considered a gift. In other words, no loans between the donor and borrower(s).

The donor(s) are permitted to borrow gift funds from an acceptable source, provided the FHA applicants are not obligated to any loan that secures money for the gift. An example is parents or grandparents obtaining a personal or secured loan that is subsequently gifted to the FHA borrower.

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:

  • state the donor’s name, address, and telephone number and,
  • the dollar amount of the gift must be specified, and
  • the donor must state the relationship to the borrower, and
    that no repayment is required.

The FHA requires strict documentation regarding the money transfer from the donor to the borrower(s). DO NOT TRANSFER ANY MONEY UNTIL YOU SPEAK TO THE LOAN OFFICER PRIOR TO THE GIFT MONEY TRANSFER. Here are the transfer rules straight out of the FHA underwriting guidelines.

FHA gift letter.pdf

If the gift funds ... Then the lender must ...
are in the borrower's account obtain a copy of the withdrawal document showing that the withdrawal was from the donor's account, and the borrower's deposit slip and bank statement showing the deposit.
are to be provided at closing, and are in the form of a certified check from the
donor’s account
obtain a bank statement showing the withdrawal from the donor’s account, and a copy of the certified check.
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 have the donor provide a withdrawal document or cancelled check for the amount of the gift, showing that the funds came from the donor’s personal account.
are to be provided at closing, and are in the form of an electronic wire transfer to the closing agent have the donor provide documentation of the wire transfer. Note: The lender must obtain and keep the documentation of the wire transfer in its mortgage loan application binder. While the document does not need to be provided in the insurance binder, it must be available for inspection by FHA’s Quality Assurance Division (QAD) when that office conducts its onsite review.
are being borrowed by the donor, and documentation from the bank or other savings account is not available have the donor provide written evidence that the funds were borrowed from an acceptable source, not from a party to the transaction, including the lender. Important: Cash on hand is not an acceptable source of donor gift funds.