FHA Loan Rules for Down Payment Gifts
FHA Loan Rules for Down Payment Gift Funds March 22, 2017 – Borrowers wishing to purchase a home with an FHA loan may need some help with the down payment. There are rules that permit a borrower to receive such outside help, but the source and purpose of these funds are carefully regulated under FHA mortgage loan rules.
The FHA single-family home loan rule book, HUD 4000.1, has detailed instructions for the lender where gift funds are concerned. Gifts are traditionally used for home loan expenses including down payments, but when the borrower accepts gift funds for the purpose of making that down payment, the funds must meet FHA acceptability standards. Do you know what those standards are?
HUD 4000.1 says down payment funds, regardless of their source, cannot be generated with proceeds from a “non-collateralized loan” to include payday loans or credit card cash advances.
Any outside help on a down payment via gift funds must be “no strings attached” gifts. In other words, a genuine gift with no requirement to give the money back later. HUD 4000.1 describes this requirement quite specifically:
“Gifts refer to the contributions of cash or equity with no expectation of repayment.”
Yes, the above quote from the FHA loan rule book states that equity can be provided instead of hard cash.
FHA loan rules don’t just regulate the source of funds in this way, it also governs who may provide such gifts. From HUD 4000.1, gifts may be provided by:
the borrower’s family member;
the borrower’s 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 that has a program providing homeownership assistance to low or moderate income families; or first-time homebuyers.
Documentation of funds used for the down payment is an important task for the loan officer, and all gift money will be scrutinized accordingly:
“If the gift funds have been verified in the Borrower’s account, obtain the donor’s bank statement showing the withdrawal and evidence of the deposit into the Borrower’s account. If the gift funds are not verified in the Borrower’s account, obtain the certified check or money order or cashier’s check or wire transfer or other official check, and a bank statement showing the withdrawal from the donor’s account.”
Be prepared to provide supporting documentation for the source of any financial gift associated with your home loan transaction.