A Guide To FHA Gift Funds

Wondering about how you'll handle all the costs that go along with purchasing a home? A loved one may be able to help you make your home purchase a reality. However, you can't just accept a large gift of funds for home from a close friend, family member or other person without paying close attention to the rules.

If someone wants to give you money to help you purchase a home, you’ll want to know exactly how to handle Federal Housing Administration (FHA) gift funds when they come your way.

What Are FHA Gift Funds?

FHA gift funds are assets that are given from a donor to a borrower. The donor can gift funds or equity to put toward a down payment, closing costs or in some instances, housing reserves for an FHA home loan. The donor should not expect repayment.

This information pertains to FHA loans, other loans may different requirements. FHA mortgages are government-backed loans that you get from a lender. Note that you don't borrow directly from the federal government. Instead, it insures the loan to help protect your lender if you default.

What Is An FHA Gift Letter?

When you receive gift funds for an FHA loan, they are not meant to be repaid since they are considered gifts, which is often stated in the gift letter.

An FHA gift letter is used to prove that you, the borrower, received a gift in which repayment is not necessary. The gift letter must be written and signed by the donor and state that the money given is in fact a gift, not a loan.

The donor should write a few other items into the FHA gift letter, including:

• The donor’s name, address and phone number
• The borrower’s name as recipient
• The date the funds were/will be transferred
• The donor’s relationship to the borrower
• The dollar amount of the gift
• A clear statement of how you will use gift money
• A clear statement showing that the donor has no expectation of repayment
• A clear statement certifying the funds were not obtained from and unacceptable source, including the seller, real estate agency/broker, builder, loan officer or any entity associated with them.
• Borrower and donor signatures
• A copy of the gift fund check (along with evidence that the borrower received the funds as well as a bank statement that shows the withdrawal from the donor’s bank account). It’s important to note, a donor can not give cash on hand as a gift. Gift funds must be traceable from the donor’s bank account to the borrower’s bank account.

It's a good idea to keep the gift letter as formal as possible and keep these topics in mind. You or your donor may want to learn more about other requirements your lender has for the letter prior to writing it. Speak with your lender because they may have a template or format you can use.

How Do FHA Gift Funds Work?

As mentioned before, both donors and borrowers must adhere to specific FHA gift funds guidelines. FHA gift funds need to be gifted for a specific reason and they can’t, under any circumstances, be loans.

• Gifts can come from the following FHA acceptable gift donors:
• Family members
• Employers or labor unions
• Close friends
• Charitable organizations
• Governmental agencies or public entities that provide homeownership assistance to low- or moderate-income families or first-time home buyers

While cash gifts are pretty straightforward (money given for a specific purpose), a gift of equity is a little different. Instead of providing money, a donor sells the borrower a home at a lower price than the home is worth. The borrower can then use the equity in the home toward a down payment or other costs. A gift of equity can only come from family members of the borrower.

FHA Gift Funds Example

Let's take a look at a couple of real-world examples of FHA gift funds.

Let's say a donor decides to give a borrower $10,000 toward a down payment on a home. The donor can wire the money to the borrower or write a check, making a copy of the check before they send it. They will then write a gift letter stating the factors listed above as well as the fact that it is a gift, not a loan.

In the case of a gift of equity, let's say a family member sells a borrower a home for $200,000 but it's worth $350,000. They could then use the equity (the difference between the amount owed and the value of the home) available in the home. In this case, there is $150,000 of equity available to use.

What Can FHA Gift Funds Be Used For?

FHA gift funds can be used for things like closing costs, down payments and in some cases mortgage reserves. Mortgage reserves refer to assets (such as cash) that you can access to help you make your mortgage payments. They are what is left over after you've made your down payment and closing costs.

Note that FHA loans require a down payment of 3.5% or more of the purchase price. This means that if you use your gift fund for a down payment, it will need to be at least 3.5%.

Ultimately, mortgage lenders are looking to make sure borrowers can afford their house even if their income stops – that they aren't going to default on their loan in the future.

Who Can Receive Gift Funds On An FHA Loan?

FHA loans are ideal for first-time home buyers and borrowers who have a low income because they can be more lenient when it comes to certain eligibility criteria. For example, they often allow you to make a lower down payment and qualify with a lower credit score.

FHA loans have several requirements for eligibility. Gift funds may be able to help you qualify for the loan by helping you meet some of the following FHA guidelines:

• Credit score: You could have a minimum score of 500 with a down payment of 10% or a credit score of 580 with a down payment of 3.5%. Keep in mind that some lenders may require a minimum credit score of 580, regardless of your down payment.
• Down payment: The down payment is the amount you must put down at closing. While it can vary, the minimum down payment required is 3.5% of the loan amount.
• Closing costs: Closing costs are fees that you pay at closing, which typically cost between 3% – 6% of the loan amount. They can include costs such as upfront mortgage insurance premium (MIP), title insurance and costs to process your loan.
• Annual MIP: MIP is a required mortgage insurance premium which includes an upfront and annual payment (divided into monthly payments). If your down payment is at least 10%, you’ll pay the annual MIP for 11 years. If your down payment is less than 10%, you’ll pay it for the life of the loan.

Your loan history, debt-to-income ratio and a host of other factors also determine eligibility for an FHA or conventional loan.

Who Can Give Gift Funds On An FHA Loan?

There are limitations on who can give gift funds on an FHA loan. Here’s who the FHA deems acceptable and unacceptable gift donors.

FHA Acceptable Gift Donors

As stated earlier, these are acceptable sources who can provide FHA gift funds:

• Family members (Only family members can give a gift of equity)
• Employers
• Close friends
• Charitable organizations
• Certain governmental agencies

FHA Not Acceptable Gift Donors

In short, anyone who has a stake in or directly looks to benefit from the sale of the home may not provide gift funds. This list includes:

• Real estate agents
• The property seller
• Mortgage lenders
• Anyone else involved in the transaction
• The builder of the home

FHA Gift Fund Guidelines

There are FHA loan gift fund guidelines that the borrower must meet to properly receive gift funds. To put it simply, gift funds need to be pulled from the donor through savings accounts, stocks or savings bonds and must leave the donor’s bank account and directly enter the borrower’s bank account.

Borrowers must show documented proof that the gift funds are a gift and not a loan. A gift letter can be used as that proof. Borrowers may need to provide other documentation depending on how they use their gift funds. It's always a good idea to ask your lender about any other documentation you need to provide.

The Bottom Line

FHA gift funds from a donor to a borrower come in the form of monetary assistance or equity, and can give borrowers a great way to help pay for the costs that go along with purchasing a new home. However, it's important to have an acceptable donor write a gift letter that states that the money is a gift, not a loan. Ask your lender for any other information your donor needs to provide.

Ready to get an FHA loan? Start an application today with Rocket Mortgage^®.