Coming up with the money needed to buy a home can be challenging, especially for first-time buyers. If you are using an FHA loan, eligible gift funds may help cover some of the cash needed for your purchase.
FHA gift funds can potentially be used toward your required investment and other eligible costs, but the money must come from an acceptable source and be properly documented.
What Are FHA Gift Funds?
Under FHA guidelines, a gift is a contribution of cash or equity with no expectation of repayment. This distinction is important because money that must be repaid is not considered a gift.
Gift funds can help eligible borrowers who have sufficient income to manage a mortgage but have not accumulated enough savings for all of the upfront costs associated with buying a home.
Who Can Give You Gift Funds for an FHA Loan?
Current FHA guidelines allow gift funds from several acceptable sources. Depending on the circumstances, these may include:
- A family member
- An employer or labor union
- A close friend with a clearly defined and documented interest in the borrower
- A charitable organization
- A governmental agency or public entity with an eligible homeownership assistance program
Additional FHA rules apply when gift funds are being used toward the borrower's minimum required investment, so the source should always be reviewed with your lender.
Can FHA Gift Funds Cover the Entire Down Payment?
Gift funds may be permitted to cover some or all of the borrower's required cash investment when FHA requirements are satisfied. For qualifying borrowers with a minimum decision credit score of 580, FHA financing can permit a minimum required investment of 3.5% of the adjusted value.
Borrowers with scores from 500 through 579 are generally limited to 90% loan-to-value financing under FHA guidelines, which means a larger investment is required. Individual lenders may also have additional underwriting requirements.
What Is Required in an FHA Gift Letter?
Your lender must document that the funds are truly a gift and that repayment is not expected. FHA requires a gift letter signed and dated by both the donor and borrower.
The gift letter generally needs to include:
- The donor's name, address, and telephone number
- The donor's relationship to the borrower
- The dollar amount of the gift
- A statement that repayment is not required
A gift letter by itself may not complete the documentation. The lender must also verify the transfer and acceptable source of the funds according to FHA requirements.
How Should FHA Gift Funds Be Transferred?
Documentation requirements depend on how and when the gift is transferred. The lender may need bank statements, evidence of an electronic transfer, a canceled check, withdrawal and deposit documentation, or verification that the settlement agent received the money directly from the donor.
Cash on hand is not an acceptable source of donor gift funds under FHA guidelines. Because documentation matters, speak with your lender before transferring or depositing gift money.
Do FHA Gift Funds Have to Be Repaid?
No. If the money must be repaid, it does not meet FHA's definition of a gift. A legitimate gift must be provided without an expectation of repayment.
Trying to characterize a personal loan as a gift can create problems during underwriting. If someone is providing money that you will eventually repay, tell your lender so it can be evaluated correctly.
Can Gift Funds Help With Closing Costs?
Depending on the transaction and applicable FHA requirements, acceptable gift funds may also help with eligible closing costs and other expenses associated with the purchase.
Remember that buying a home can involve more than the down payment. Buyers may need funds for closing costs, prepaid taxes and insurance, inspections, moving expenses, and reserves for future repairs.
Using FHA Gift Funds to Buy a Home
FHA gift funds can make homeownership more accessible when savings are the primary obstacle, but following the documentation requirements is essential. Identify your donor early, discuss the gift with your mortgage professional, and document the transfer correctly.
Loan Wolf Lending can help Florida homebuyers understand FHA financing, gift fund requirements, and other potential down payment options. Call 754-755-3075 to discuss your homebuying plans.