FHA Guidelines On Gift Funds For Down Payment And Closing Costs

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FHA Guidelines On Gift Funds For Down Payment And Closing Costs

This BLOG On FHA Guidelines On Gift Funds For Down Payment And Closing Costs Was Updated On November 21st, 2018

FHA Guidelines On Gift Funds is very lax.

  • Under FHA Guidelines On Gift Funds, borrowers can accept 100% gifted funds for their down payment by family members and/or relatives

Here are the down payment requirements on FHA Loans

FHA Allows 100% of the down payment for a home purchase to come by gifted funds:

  • Minimum credit scores to qualify for FHA Loans is 580 FICO for a 3.5% down payment home purchase loan
  • Borrowers with credit scores under 580 FICO can qualify for FHA Loans
    • But require 10% down payment
  • Gift Funds can be used for down payment and/or closing costs on a home purchase
  • Gift funds needs to be a gift and not a loan
  • Donor of the gift needs to sign a gift letter
  • Gift letter form is provided by the mortgage company
  • Gift Letter states that the funds gifted is not a loan and solely a gift and will not repaid

Home Purchase With FHA Loans

FHA only requires 3.5% down payment on a home purchase:

  • This holds true as long as borrowers has a minimum credit score of 580 FICO
  • Borrowers with credit scores between 500 to 580 FICO and under require a 10% down payment on a home purchase
  • Down payments on FHA loans can be gifted by either family members and/or relatives

How Do Lenders View Gift Funds

Gift Funds are not viewed favorably by both HUD and lenders.

  • HUD, the U.S. Department of Housing and Urban Development, is the parent of the Federal Housing Administration ( FHA )
  • There are times where the Automated Underwriting System states that down payment needs to come from borrower and gift funds are not allowed

This often happens when borrowers have the following:

  • Lower credit scores
  • Large amounts of collections and charge off accounts
  • Higher debt to income ratios
  • Manual Underwriting
  • Recent late payments
  • Limited and unseasoned credit tradelines

Gift funds are no problem if borrowers have good credit scores and strong credit tradelines.

Documenting Gift Funds

Gift funds can only be accepted as follows:

  • Gift letter provided by lender needs to be completed and signed
  • Gift letter will state that the donor of the gift is gifting the funds and it will not be paid back to the borrower
  • Donor needs to provide 30 days of bank statements reflecting that gift funds has been seasoned for that amount of time
  • Borrower needs to provide proof of gift by providing deposit slip, copy of check, and/or bank statement showing gift funds leaving donor’s account and being deposited to borrower’s bank account

Who Can Gift Borrowers?

The following people can be donors of gift funds:

  • Relatives and family members of borrower
  • Organizations such as labor unions and charities

Closing Costs On FHA Loans

There are two types of costs that FHA borrowers need to come up on a home purchase:

Down payment on home purchase is a fixed amount of 3.5% down. However, closing costs vary depending on the county where the buyer is purchasing a home.

Here are examples of closing costs on home purchase

  • Appraisal and inspection costs and fees
  • Pre-paids:
  • Origination fees which includes points
  • Homeowners insurance premium
  • Attorney’s fees
  • Title charges
  • Recording fees
  • Transfer stamps
  • Transfer fees
  • Any other third party costs and fees associated with the home closing

Sellers Concessions Versus Gift Funds For Home Down Payment

Closing costs can run into thousands of dollars:

  • There are times where closing costs can exceed the down payment on a home purchase
  • Home buyers can use gift funds closing costs
  • However, buyers cannot use sellers concessions for the down payment on a home purchase
  • Sellers concessions are when a home seller contributes the home buyer’s closing costs
  • Under FHA Guidelines On Gift Funds, gift funds can be used for both closing costs and/or down payment on a home purchase

Here are the maximum allowable sellers concessions on the different loan programs

  • Up to 6% sellers concessions is allowed on FHA Loans
  • Up to 4% sellers concessions is allowed on VA Loans
  • Fannie Mae and Freddie Mac allows 3% sellers concessions for owner occupied homes
  • 2% for investment properties (1 to 4 units)
  • USDA allows 6%

What Are Lender Credit

A lender credit is when the lender will give borrowers credit to cover their closing costs on a home purchase or refinance mortgage transaction in lieu of a higher interest rate.

  • Lender credits can be used to cover closing costs but cannot be used for down payment
  • The down payment needs to come by the borrower’s own funds or gifted funds
  • In general, borrowers do not have to worry about closing costs
  • All they need to do is just have the down payment on a home purchase
  • Again, down payment can be by their own funds or gifted funds
  • Home buyers can also borrower their down payment from their 401k and/or retirement accounts

The minimum payments they need to pay back is not calculated when calculating debt to income ratios. This is  because it is not a debt if borrowers are borrowing their own funds. Viewers who have any questions on how much money they need to purchase a home, please contact Gustan Cho Associates at 262-716-8151 or text for faster response. Or email us at gcho@gustancho.com.

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