How Can I Use FHA Gift Funds to Buy a Home?

Did you know that you can give or receive the gift of homeownership? Several loan programs welcome the use of gifted funds to cover common home-buying expenses:

• • Down payment
  • Closing costs
  • Debt repayment

Each loan program has specific guidelines for gift funds. In this post, we’re going to explain the Federal Housing Administration’s stance on the use of a gift of funds or equity with an FHA loan purchase.

FHA Gift Funds Defined

FHA defines a gift as a contribution of cash or equity from a donor to a borrower with no expectation of repayment.

The gift may only come from specific, allowed sources and it must be documented.

Borrowers should not cover up an “under the table” personal loan by calling it a gift. Right on the official gift letter, they normally state this line “no repayment of this gift is expected or implied.”

Can Anyone Provide Gift Funds?

FHA gift funds guidelines have become more defined in this area. Previously, a second cousin twice removed (or however that works) could gift funds, but now FHA has the following list and sticks to it in order to make sure that there is a clearly defined relationship.

• • • Borrower’s family member (related by blood or marriage)
    • Employer or labor union
    • A close friend with a clearly defined and documented interest in the borrower (fiance, significant other, parent, godparent)
    • Charitable organization
    • A governmental agency or public entity that has a program providing homeownership assistance to low income families or first-time homebuyers

Who Cannot Give FHA Gift Funds?

One of the most important rules is that an interested party to the transaction may not provide the gift. This includes the:

• • • Seller
    • Loan officer
    • Relator
    • Builder

The purpose of the interested party rules is to ensure that the seller is not propping up a buyer to appear stronger than they really are, but there are exceptions for who may provide the gifted down payment.

Exceptions to Interested Party Gift Rules

An exception comes into play for family members of real estate agents. Even though the agent is an interested party, they can give part or all of their commission as a gift if the buyer is a family member.

That’s pretty neat because technically the funds are not available until the deed is recorded. The commission to be paid must be proven up-front, a gift letter provides the details. As a buyer, that will get the thoughts flowing for which family member is a local real estate agent!

FHA Gift Letter Requirements

FHA gift funds rules stipulate that the relationship and terms must be specified on an FHA gift letter.

The gift letter must include:

• • • A fully executed gift letter:
      • Donor’s name, address, & phone number
      • Their relationship to the borrower
      • Amount of the gift
      • A statement confirming that the buyer doesn’t have to pay back the gift
      • Borrower(s) and donor(s) signatures with date
    • Copy of the gift check
    • Evidence that the borrower has received the gift funds or evidence given to the closing agent
    • Donor bank statement showing a gift withdrawal transaction

Although we have do have a formal FHA gift letter, the donor and borrower may usually write up their own gift letter. Either way, you must include the items listed above. It is best to just use the lender’s form.

5 FHA Gift Fund Tips

• • 1. Do not gift cash
    2. Document the funds
    3. Talk to your family member about the terms of the gift to confirm that repayment is not necessary
    4. Gift funds may be used in conjunction with down payment assistance programs
    5. Most importantly, discuss options, requirements, and solutions with your loan officer.

FHA Gift of Equity Purchase Rules

Sometimes, the house you want is closer than you think. Parents, siblings, aunts, uncles, or others may be selling a great house. That is a great opportunity to buy a home from a trusted family member and also probably know the home’s history. Another advantage includes the benefit of a gift the equity to the related buyer.

Thus, if the property is worth $200,000 and the seller only wants $175,000, the $25,000 equity may be gifted as a down payment. Not only can the seller gift the down payment, but the seller may also pay the closing costs. Resulting in a true no-money-down purchase for the buyer.

Keep in mind, only actual family members may provide equity as a gift when selling to another family member. So, an LLC, trust, or other entity may not provide a gift of equity.

Learn more about using a gift of equity here.