Everything You Need to Know About FHA Loan Gift Funds

Buying a home is an exciting milestone in life. But for many people, coming up with the down payment is the biggest obstacle to homeownership. That’s where FHA loan gift funds can help.

FHA loans are government-backed mortgages insured by the Federal Housing Administration (FHA). They require lower down payments and credit scores than conventional loans This makes them popular with first-time homebuyers and buyers with limited savings

If you don’t have enough cash for a down payment, receiving gift funds is a common way to qualify for an FHA loan But there are guidelines you must follow to use gift funds with an FHA mortgage

In this comprehensive guide, I’ll explain everything you need to know about FHA loan gift funds. I’ll cover:

• What are FHA gift funds?
• FHA gift funds vs gift letters
• Who can gift funds for an FHA loan
• Acceptable sources of gift funds
• Gift funds documentation
• Downpayment assistance programs
• Tips for using gift funds

Let’s dive in!

What Are FHA Gift Funds?

FHA gift funds refer to money given to a homebuyer by a relative, employer, charity, or other approved party to use toward their down payment or closing costs.

Gift funds must be outright gifts, meaning the recipient is not expected or required to repay the money. And the donor cannot have any type of ownership interest in the property.

With an FHA loan, you can receive gift funds to cover:

• Down payment
• Closing costs
• Prepaid expenses like homeowner’s insurance premiums, property taxes, and mortgage insurance premiums

You can also use gift funds to meet FHA reserve requirements. FHA requires you have enough savings after closing to cover at least two mortgage payments.

Gift funds make FHA financing accessible for buyers who don’t have enough cash on hand. FHA only requires a minimum down payment of 3.5%. On a $300,000 home, that’s just $10,500.

FHA Gift Funds vs Gift Letters

You might hear the terms “gift funds” and “gift letters” used interchangeably. But they refer to different things:

• Gift funds are the actual money gifted to the buyer.
• Gift letters document that the money was truly a bonafide gift.

When you use gift funds toward an FHA mortgage, the lender must document that the funds are a gift and not a loan. Otherwise, it could look like you’re borrowing money outside of your qualifying income and debts.

That’s where the gift letter comes in. It’s a signed letter from the donor stating:

• The amount of the gift
• The donor’s relationship to the recipient
• That no repayment is required

The gift letter reassures the lender that you won’t have to repay the gift. This prevents gift funds from skewing your debt-to-income ratios.

Who Can Gift Funds for an FHA Loan?

FHA restricts gift funds to certain eligible donors. Acceptable sources of gift funds include:

• Relatives – Parents, grandparents, siblings, aunts, uncles, cousins, children, etc. There is no limit on the degree of relation.

• Your employer or labor union

• Nonprofit organizations approved by HUD

• Local, state, or federal government agencies or municipalities

• A close friend with a clearly defined interest in your transaction. For example, someone helping you achieve homeownership.

Gift funds cannot come from:

• The property seller
• Real estate agents involved in the transaction
• Lenders associated with the transaction

FHA also prohibits “gifts” that are later recouped through equity sharing arrangements.

Acceptable Sources of Gift Funds

While FHA restricts who can give gift funds, they are flexible on the form gift funds can take. Acceptable sources of gift funds include:

• Cash – Given via check, wire transfer, official bank withdrawal, etc. Cash gifts must be documented entering and leaving the donor’s account.

• Savings bonds – Can be used at purchase price unless you confirm higher redemption value.

• Equity credit – When a donor sells you a property below market value. The difference counts as a gift.

• Securities – Stocks, bonds, and mutual funds. Must document transfer and recipient’s ownership.

• Private savings clubs – Must provide club meeting minutes, member affidavits, receipts, and club account statements.

• Cash saved at home – Must provide satisfactory explanation and documentation of accumulation.

• 401(k) or IRA funds – Allowed up to 60% of vested amount unless evidence provided for larger portion.

Documenting the paper trail of gift funds is mandatory. The lender must verify the funds originated from an acceptable source and were not borrowed.

Gift Funds Documentation

FHA has strict documentation standards for gift funds received toward a mortgage:

• Gift letter – Signed statement from donor confirming gift amount, relationship, and non-repayment.

• Proof of transfer – Documents showing gift funds leaving donor’s account and entering recipient’s account. Bank statements, wire transfer receipts, withdrawal slips, etc.

• Donor bank statements – 60-day history to verify sufficient funds and no debt incurred for gift.

• Recipient bank statements – 60-day history to show gift funds on deposit.

• Donor source of funds – Documentation verifying funds originated from the donor’s own accounts without borrowing. W-2s, tax returns, bank/asset statements.

• Transfer evidence – For non-cash assets, document transfer of ownership to recipient. Stock transfer receipts, deed recordings, etc.

Following FHA gift documentation guidelines prevents fraud. It proves you won’t have hidden debts or repayment obligations affecting your finances.

Downpayment Assistance Programs

Many nonprofits and state/local agencies offer downpayment assistance programs for FHA buyers. These programs gift funds toward your down payment and closing costs.

The gift funds come in the form of grants, forgivable loans, or deferred subordinate liens. As long as you fulfill program requirements, you don’t repay the funds.

Downpayment assistance programs must be approved by FHA. They simplify the documentation process by providing a single gift letter stating all program terms.

Downpayment assistance is a great way to get into homeownership if you don’t have the cash or family support. Just ensure the program is FHA-approved.

Tips for Using FHA Gift Funds

If you plan to use gift funds toward an FHA loan, keep these tips in mind:

• Make sure the donor is an eligible FHA gift giver before accepting funds.

• Discuss documentation needs with your lender upfront.

• Get the gift letter signed as early as possible.

• Have the donor provide a bank statement showing withdrawal of the gift funds.

• Deposit gift funds into your account right away. Avoid large unexplained deposits.

• Use a wire transfer or cashier’s check from the donor’s account rather than cash.

• Don’t make any big purchases or cash withdrawals after the gift funds deposit.

Following FHA gift funds guidelines prevents headaches during the mortgage process. With proper documentation, gift funds can make your dream of homeownership come true!

The Bottom Line

FHA loan gift funds allow your loved ones to help you buy a home. If you receive gift funds toward an FHA mortgage, just remember:

• The donor must be an eligible FHA gift giver

• The funds must be fully gifted with no repayment

• You must provide complete paper documentation

By understanding the rules and documentation, FHA gift funds can help you overcome the biggest hurdle to homeownership – the down payment.