Gift Funds Guidelines for FHA Loans
Gift funds are a very popular way of paying a down payment or for paying closing costs & pre-paids when purchasing a home. On most mortgage loan programs, a gift is an acceptable source of funds as long as they are:
- Truly a gift and there is no expected or implied repayment back to the donor,
- The gift is fully sourced and documented, AND
- The gift is from an allowable source. A buyer can actually purchase a home with none of their own money as it can all be a gift.
Acceptable Sources for Gift Funds on FHA Mortgages:
- Family member: FHA defines a family member, regardless of actual or perceived sexual orientation, gender identity, or legal status:
- Child, parent, or grandparent. A child is defined as a son, stepson, daughter or stepdaughter. A parent or grandparent includes a step-parent/grandparent or foster parent/grandparent
- Spouse or domestic partner
- Legally adopted son or daughter. This includes a child placed with the borrower by an authorized agency for legal adoption
- Foster child
- Brother or stepbrother
- Sister or stepsister
- Uncle or Aunt
- A son-in-law, daughter-in-law, mother-in-law, father-in-law, brother-in-law, or sister-in-law of the borrower
- Employer or labor union for borrower: An employer or labor union may gift the down payment. A salary advance is not a gift so cannot be considered as cash to close.
- Close friend with a clearly defined and documented interest in the borrower. This relationship must be documented which can be very difficult to prove. A signed letter from the borrower or friend does not meet this guideline
- Charitable organization
- Government agency or public entity that has a program providing home ownership assistance to low and moderate income families or first-time homebuyers
The following guidelines apply towards the use and documentation of gift funds on an FHA transaction:
Make sure you ask us how best to document a gift before making the transfer!!
- A gift letter signed and dated by the borrower and donor. The gift letter must show the donor’s name, address, phone number, dollar amount of the gift, relationship between the borrower and the donor, and state that no repayment is required. Here is an approved gift letter format
- Document the transfer of the gift funds from the donor to the borrower. If the gift funds have been verified in the borrowers bank account, provide the donor’s bank statement to verify the withdrawal of the gift funds and the borrower’s bank statement to verify the deposit of all gift funds. If the gift funds have not been verified in the borrower’s account, obtain a certified funds check, wire transfer, cashier’s check, or money order and a bank statement showing the withdrawal from the donor’s account.
- If the donor borrowed the gift funds and documentation from the bank or other savings account is not available, the donor must provide written verification that the funds were borrowed from an acceptable source and did not come from a party in the transaction.
- Surplus gift funds may not be considered for asset reserves
- Cash on hand is not an acceptable source of gift funds. Read here why you shouldn’t deposit cash when getting a mortgage
- The gift must be verified to have come from an acceptable source and were the donor’s own funds no matter when the funds were delivered to the borrower.
- All gift documentation must be received and cleared by underwriting prior to closing
Even though, these are detailed instructions for a gift, make sure that you talk to one of our loan officers on how to document the gift prior to transferring the funds.