New 2016 FHA Guidelines On Gift Funds

Changes And New 2016 FHA Guidelines On Gift Funds

The Federal Housing Administration, often referred to as FHA, is part of the United States Department of Housing and Urban Development, often referred as HUD. FHA is not a mortgage lender and does not originate or fund FHA Loans. Many consumers think that FHA is a government mortgage lender that originates, processes, underwrites, funds, and services FHA Loans. This is absolutely not the case. FHA’s main function and role is to insure mortgage loans to banks and mortgage lenders who are FHA approved and meet all of FHA mortgage lending requirements .  By insuring the FHA Loans, in the event if a mortgage loan borrower who has a FHA Loan ever defaults and the FHA approved mortgage lender takes a loss when the property gets foreclosed, then FHA steps in and will insure the loss the FHA approved mortgage lender took a hit on. However, in order for FHA to insure the FHA mortgage loan, all FHA loan applications need to meet all of FHA mortgage lending guidelines. On September 14, 2015, FHA came out with their newest FHA lending guidelines which is call HUD’s FHA 4000.1 Handbook where it details all of the FHA mortgage lending requirements that FHA approved mortgage lenders need to follow and abide by in order for FHA to insure the FHA Loans they originate and fund. New 2016 FHA Guidelines On Gift Funds is part of the new guidelines that FHA came up with. FHA allows home buyers to get 100% gifted funds for the 3.5% down payment requirement on a FHA home purchase.

2016 FHA Guidelines On Gift Funds: How Does It Work?

2016 FHA Guidelines On Gift Funds state than home buyers can get 100% gift funds to purchase their home. However, there are strict rules and regulations with 2016 FHA Guidelines On Gift Funds. First, gift funds can only be used for down payments and closing costs. Home Buyers cannot use gift funds for reserves that is required by mortgage lenders. Reserves is one month’s of principal, interest, taxes, and insurance, also referred to as P.I.T.I. Many times, mortgage lenders will ask for three months reserves for mortgage loan borrowers with under 600 FICO credit scores . Reserves needs to be the home buyer’s own funds and cannot be gifted. Asset accounts that can be used for reserves includes IRA retirement accounts, 401k retirement accounts, savings accounts, CD’s, and investment securities accounts. There is no requirement that reserves to be escrowed with the title company. However, reserves will not just be verified in the beginning of the mortgage loan application process but also to the mortgage underwriter issuing a clear to close .

How Do Lenders View Gift Funds

Although FHA allows 100% gift funds to be used for down payment and closing costs, lenders do not view gift funds favorably, especially the Automated Underwriting System . There are so many cases where a mortgage borrower with low credit scores and poor credit history but does meet the mandatory minimum FHA lending guidelines will not get an automated underwriting system approval if they get 100% gifted funds for their down payment, however, if you remove the gift funds from the mortgage loan application, the Automated Underwriting System will render an approve/eligible per Automated Underwriting System . Cases like these, we need to remove the gift funds and have the borrower come up with his or her own funds.

Strategies Of Avoiding Gift Funds To Be Used For Down Payment

When a mortgage loan borrower cannot get an approve/eligible per automated underwriting system due to getting gift funds for down payment and/or closing costs but will get an approve/eligible when the gift funds are not used, then there are certain strategies that we can use where we can avoid the gift funds. We can try adding the borrower to the bank account of the donor of the gift funds and have them have joint banking accounts. Once you are added to another person’s bank account, you can get a two month bank statement print outs and have those pages signed, dated, and stamped by the bank teller. You will also need a letter signed and dated by the joint bank account holder or holders that you have 100% access to the joint bank account. Another way of avoiding gift funds is by depositing the gift funds by the donor into your bank account and let it season for 60 days.

Getting A Gift For Your Down Payment

If you are getting gift funds for your down payment on your home purchase, the donor needs to sign a gift letter which will be provided to you by your mortgage lender that states that the gift funds is solely a gift for the home purchase down payment and/or closing costs and it is not a loan and will not get paid back to the donor. Whether or not the home buyer pays the donor back or not is not enforced, but, regardless, that verbiage on the gift funds donation letter needs to be stated and signed and dated by the gift donor. The donor also needs to provide 30 days of bank statements and all funds on the donor’s bank account needs to be sourced. The gift funds leaving the donor’s account into the home buyers account needs to be provided. The home buyer needs to provide a copy of the canceled check of the gift funds and/or bank statements by both parties showing the gift funds leaving the donor’s bank account and transferred to the home buyer’s bank account.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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