Who Can Give Gift Funds on an FHA Loan?

The Federal Housing Administration (FHA) offers popular loan options for homebuyers, often requiring lower down payments compared to conventional mortgages. To help meet these financial requirements, borrowers may utilize gift funds. These funds, provided by an eligible donor, can significantly reduce the upfront costs associated with purchasing a home. However, strict rules govern who can provide these gifts and how they must be documented, ensuring the integrity of the loan process and preventing potential conflicts of interest.

Eligible Donors

The FHA provides guidelines for gift fund donors. Generally, these funds must come from a source that does not have a financial interest in the transaction.

Family members are typically considered eligible donors, encompassing individuals related by blood, marriage, or law, such as parents, grandparents, siblings, children, aunts, uncles, and cousins. Fiancés or domestic partners are also permitted to provide gift funds.

Employers or labor unions may offer gift funds, provided these contributions are not tied to employment conditions. Charitable organizations with federal tax-exempt status are another acceptable source, often participating in housing assistance programs. State, local, or federal government agencies can also provide down payment assistance or gift funds through various housing initiatives.

In some cases, a close friend may be an eligible donor, but this is a more stringent category requiring a clearly defined and documented relationship with the borrower. Lenders may request additional proof, such as old photos or a written explanation, to substantiate the long-term nature of the friendship.

Ineligible Donors

To maintain loan integrity and prevent conflicts of interest, the FHA prohibits certain individuals or entities from providing gift funds. Anyone who stands to gain financially from the sale of the property is an ineligible donor.

This includes the seller, real estate agents or brokers involved in the transaction, and the loan officer or mortgage broker facilitating the loan. Similarly, the builder or developer of the property, or any other party with a financial interest in the property’s sale, cannot provide gift funds. These prohibitions prevent inflated property prices, hidden fees, or undue influence that could compromise the home purchase.

Required Documentation for Gift Funds

Proper documentation is essential when using gift funds for an FHA loan. A mandatory gift letter must be provided, signed and dated by both the donor and the borrower.

This letter needs to include the donor’s full name, address, telephone number, and their relationship to the borrower. The gift letter must also clearly state the exact dollar amount of the gift and explicitly confirm that no repayment is expected.

Lenders will require documentation from the donor to verify the source of the funds and confirm they were not borrowed. This typically involves providing bank statements from the donor showing the withdrawal of the gift funds, often demonstrating sufficient funds in their account for at least 30 to 60 days prior to the gift.

The borrower must also provide proof that the gift funds were deposited into their account, usually through bank statements showing the deposit. Other documentation options are also allowed. These can include copies of the canceled check (front and back) paired with evidence of deposit into the borrower’s account, or a line item transaction showing the electronic transfer of funds from the donor’s account to the borrower’s account.

Acceptable Uses for Gift Funds

FHA gift funds can cover various costs associated with a home purchase. The most common application is to cover all or part of the required minimum down payment for an FHA loan, which is typically 3.5% of the home’s purchase price for borrowers with credit scores above 580.

These funds can also be applied towards allowable closing costs. This includes expenses such as origination fees, appraisal fees, title insurance premiums, attorney fees, and recording fees.

Additionally, gift funds can be used to cover prepaid items and initial escrow amounts, such as property taxes and homeowner’s insurance premiums that are collected at closing and placed into an escrow account.

FHA gift funds cannot be used for all financial aspects of homeownership. Specifically, they are not permitted for cash reserves if such reserves are required by the lender, nor can they be used to pay off other debts that the borrower may have. The purpose of these funds is strictly limited to direct costs related to the home purchase transaction.