FHA Guidelines On Gift Funds For Down Payment And Closing Costs

Gustan Cho Associates are mortgage brokers licensed in 48 states
FHA guidelines on gift funds allow homebuyers to get a gift from a family member for the down payment and closing costs on a home purchase. Homebuyers can get 100% gifted funds for the down payment and closing costs on a home purchase. Although not viewed favorably, many first-time homebuyers get gift funds from family on their first home purchase. Under FHA Guidelines On Gift Funds, borrowers can accept 100% gifted funds for their down payment by family members and/or relatives. In this article, we will discuss and cover mortgage guidelines on gift funds.

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Here are the down payment requirements on FHA Loans

Here are the down payment requirements on FHA LoansHUD allows 100% of the down payment for a home purchase to come by gifted funds. The minimum credit score to qualify for an FHA loan with a 3.5% down payment home purchase is 580 FICO. Borrowers with credit scores under 580 credit score and down to a 500 FICO can qualify for an FHA loan with a 10% down payment versus a 3.5% down payment. Gift funds can be used for the down payment and/or closing costs on a home purchase. Gift funds need to be a gift and not a loan. The donor of the gift needs to sign a gift letter. The gift letter form is provided by the mortgage company. Gift Letter states that the funds gifted are not a loan and solely a gift and will not be repaid.

Buying a Home with an FHA Loan

HUD, the parent of HUD,  only requires a 3.5% down payment on home purchases. This holds true as long as borrowers have 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 when the Automated Underwriting System states that down payment needs to come from the borrower and gift funds are not allowed.

Cases When AUS Does Not Allow Gift Funds

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

FHA Guidelines On Gift Funds On Who Can Gift Borrowers

The following people can be donors of gift funds:
  • Relatives and family members of the borrower
  • Organizations such as labor unions and charities
  • Employers

FHA Guidelines On Gift Funds With Paying Closing Costs

FHA Guidelines On Gift Funds On Who Can Gift Borrowers

There are two types of costs borrowers need to come up with on home purchase: Down payment on a home purchase is a fixed amount of 3.5% down. Closing costs vary depending on the county where the buyer is purchasing a home.
The following are common closing costs a homebuyer may incur on a purchase transaction:
  • Appraisal and inspection costs and fees
  • Pre-paid:
  • Escrow for taxes and insurance
  • Origination fees which include 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

Seller Concessions Versus Gift Funds For Home Down Payment

Closing costs can run into thousands of dollars. There are times when closing costs can exceed the down payment on a home purchase. Homebuyers can use gift funds closing costs. However, buyers cannot use seller concessions for the down payment on a home purchase. Seller concessions are when a home seller contributes to the home buyer’s closing costs. Under FHA Guidelines On Gift Funds, gift funds can be used for both closing costs and/or the down payment on a home purchase.

Maximum Seller Concession Allowed Per Mortgage Loan Program

There are a maximum amount homebuyers can accept in the seller’s concession from the seller. The amount of sellers concession homebuyers can get depends on the loan program:
  • Up to 6% of seller concessions are allowed on FHA loans
  • Up to 4% of seller concessions are allowed on VA loans
  • Fannie Mae and Freddie Mac allow 3% sellers concessions for owner-occupied homes
  • 2% for investment properties (1 to 4 units)
  • USDA allows 6% seller concession

Non-QM and alternative mortgage lenders do allow seller concessions on their loan programs. However, it is up to the lender and loan programs on the amount of seller concession. In general, seller concession on non-QM loans and/or alternative mortgage loan options vary between 2% to 6%.

Lender Credit Versus FHA Guidelines On Gift Funds

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 the down payment. The down payment needs to come from 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. Homebuyers can also borrow their down payment from their 401k and/or retirement accounts
The minimum payments they need to pay back are 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 a faster response. Or email us at [email protected]

FHA Gift Funds Guidelines For Down Payment And Closing Costs

Many first-time homebuyers are very eager to purchase a home and become first-time homeowners. Many are concerned with the down payment and closing costs for their home purchase. Many first-time homebuyers believe that they need thousands saved in order to become a homeowner. However, that is not the case. FHA requires a 3.5% down payment for a home purchase. VA Loan or a USDA Loan is the only loan program where it offers 100% financing. The down payment requirement for an FHA Loan is only 3.5% of the home purchase price.

Property Tax Proration

Many times, buyers do not need the full down payment if buying in Illinois or other states where there are property tax proration credits by sellers. May get tax proration credits depending on the county and state purchasing home. Can offset down payment with the tax proration credits. We will explain tax proration credits in a later paragraph on this blog article. All home purchase transactions and refinance mortgage transactions have closing costs associated with them.  Home Buyers who can barely come up with the down payment and cannot afford to pay any closing costs, no worries.  Most homebuyers do not have to worry about paying for closing costs.  If represented by a professional real estate agent, the agent can request a seller concession towards the home buyer closing costs. This is where the seller pays for the closing costs for the home buyer.

How Do Seller Concessions Towards Paying Home Buyers Closing Costs Work?

All mortgage loan programs have maximum sellers concession allowance towards paying for home buyers closing costs. FHA allows up to 6% for a seller to contribute to a home buyer’s closing costs. VA Loan programs will allow up to 4% sellers concession towards home buyers closing costs. Conventional loans on primary and second homes will allow up to 3% in seller concessions towards home buyers closing costs. 2% sellers concession for investment property mortgage loans. USDA will allow up to 6% in sellers concession towards home buyers closing costs. A seller concession cannot be wasted. Excess in sellers concession goes back to the home seller. Cannot be given as a cash credit to the home buyer as a kickback. It is always wise to make sure not to request more of a seller concession than the maximum needed. The mortgage loan originator will advise on how much-estimated closing costs will be

What If Home Seller Will Not Give Sellers Concession?

What If Home Seller Will Not Give Sellers Concession?

Never assume that asking for a seller concession will show a sign of weakness. I run into this situation every day where realtors will not get a seller concession. This may be because the seller is a lender ( short sales, foreclosures, REOs). Or because there are multiple purchase offers. Even the wealthiest home buyers ask for seller concessions towards home buyers closing costs. Some home sellers are not comfortable in giving a home buyer a seller concession. This is because in the event that the property does not appraise. In the event, that the property comes in at a lower value than the original purchase offer, then everything needs to go back on the drawing board anyway. Seller concession can then be eliminated at that time.

Seller Concession Contigency on Purchase Contract

A seller concession contingency can be added to the home purchase contract that the seller concession is only valid if the appraisal comes in at the purchase offer value. In the event, that the home seller does not agree to give a seller concession to the home buyer there are options. If the home buyer has only the down payment but not the closing costs, the buyer can request a lender’s credit towards the closing cost. How this works is the lender can cover most or all of the home buyers closing costs in lieu of a slightly higher mortgage rate.

What If I Don’t Have Down Payment For Home Purchase? Gift Funds

All home buyers will need to document the down payment. If borrowers deposit a large chunk of cash money in the bank account, that money cannot be used towards the down payment. Lenders want to see down payment has been sourced and/or seasoned in a bank account for at least 60 days. When applying for a mortgage loan application, one of the most important items that the mortgage underwriter will ask is 60 days of bank statements.

Sourced Funds For The Down Payment

The mortgage underwriter will want to see a down payment in the bank account balance. As an example, if purchasing a $100,000 home via an FHA loan, the borrower will need 3.5% of the purchase price, or $3,500, to show for the down payment. The mortgage underwriter will be looking for that. If the $3,500 balance is not in the bank account, the mortgage underwriter will want to know where the down payment will be coming from. Mattress money, cash, in safe is not sourced funds and cannot be used for the down payment and/or closing costs. Those funds are not seasoned. Home Buyers with cash money need to deposit it in the bank account and let it season for 2 months in order for it to be considered verified funds.

FHA Gift Funds Guidelines For Down Payment On Home Purchase

Buyers without the down payment for a home purchase or the down payment that cannot be verified due to not being able to source it can get gift funds from a family member and/or relative. FHA Gift Funds Guidelines allow 100% gift funds from family members and/or relatives to be used as a down payment towards a home purchase. FHA Gift Funds Guidelines state that 100% of gift funds may be used for the down payment and/or closing costs but both HUD and AUS do not view gift funds favorably.

FHA Gift Funds Guidelines For Down Payment And Closing Costs

Per FHA Gift Funds Guidelines, family members or relatives can give a home buyer gift funds, up to 100%, to be used towards a home purchase and/or closing costs. However, gift funds cannot be a loan. There is a letter that the donor needs to sign certifying that the gift funds are not a loan and that the gift funds will not be paid back. When the donor is gifting the money, the donor of the gift funds needs to sign a gift letter. A gift letter is provided by the lender. 30 days of the donor’s bank statement showing that the funds were seasoned in the donor’s bank account for at least 30 days need to be provided. The gift funds leaving the donor’s account and a deposit slip being deposited into the recipient’s account need to be provided.

Other Sources That Can Be Used Towards Down Payment And Closing Costs

Other Sources That Can Be Used Towards Down Payment And Closing Costs

In addition to bank accounts such as checking accounts and/or checking accounts, buyers can use other assets to source down payment and/or closing costs. Certificate of Deposits can be used to verify down payment funds. Investment accounts such as stocks, bonds, and treasuries can be used as sourced funds. Retirement accounts can be used as well as long as they can be liquid such as being able to borrow against it. Investment accounts such as IRA accounts and 401k accounts can also be counted towards reserve requirements. Some lenders may require a home buyer to have 3 to 6 months of reserves (One month of reserves is equivalent to one month’s of housing payment; principal, interest, taxes, insurance, and homeowners association fees if applicable). Reserves are common requests for a home buyer with low credit scores, high debt to income ratios, or manually underwritten mortgage loan applications.

Sale Of High Ticket Item To Be Used Towards Home Purchase Down Payment

Home Buyers can use a sale of a high ticket item towards the down payment of a home.  For example, if the buyer is selling a sports car for $10,000 and needs that money for the down payment, they can use that $10,000 towards the down payment for a home purchase. However, it needs to be sourced and verified.  A copy of a bill of sale is required as well as the copy of the check and the check being deposited to the home buyer’s bank account along with the deposit slip.

Related> Down payment and closing costs Related> Closing costs on home purchase Related> How much are closing costs?  

HUD Gift Funds Mortgage Lending Guidelines On Home Purchase

We all know the American dream is owning your own home. This can be easier said than done. Besides, the qualifying credit score and enough income to quality assets for the down payment can be the hardest obstacle of obtaining homeownership. With home values on the rise across our great country,  borrowers now need to save more to purchase their homes. At Gustan Cho Associates, we have seen an uptick in the number of our clients who are using GIFT FUNDS. In the following paragraphs, we will cover and discuss HUD Gift Funds Mortgage Lending Guidelines On Home Purchase.

Gift Funds For Down Payment On Home Purchase

What is a gift fund? Per the HUD 4000.1 Handbook, a gift fund refers to the contributions of equity or cash with no expectation of repayment. A gift fun is simply money or equity given to you by an acceptable Source where you are not required to pay them back.

Who Can Offer Gift Funds To Home Buyers

Who can give you gift funds? Per HUD Gift Funds Guidelines, gifted funds may only be provided to you from an acceptable source.  For FHA Loans the acceptable source is very specific.

See below: HUD gift funds may be provided by the following:

  •  The borrower’s family member
  • The borrower’s employer or labor union
  • A charitable organization
  • A close friend with a clearly defined and documented interest in the borrower (this WILL require documentation)
  • A public entity or government agency that has a program providing homeownership assistance for:
  • Income families
  • First-time home buyers

Documents Required Per Gift Funds Guidelines

Documentation is required to utilize get funds? The lender must obtain a gift letter signed and dated by the donor. The gift letter provided by the lender needs to include the following information:

  • The donor’s full name, address, and telephone number
  • The donor’s relationship to the borrower
  • The dollar amount for the amount of the gift
  • A written statement that no repayment is required

Donor Needs To Complete Gift Funds Letter Provided By Lenders

Donor Needs To Complete Gift Funds Letter Provided By Lenders

Gift Letter Provided By Lender For Donors. The loan officer should be able to provide borrowers with a template for a gift letter. Borrowers will then sign that and take it to the donor and have that filled out. When do you actually receive the gift? This can be a pain in the butt. Sourcing mortgage fund is a requirement and is part of the USA Patriot Act of 2001 (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism, HISTORY LESSON, PATRIOT ACT is an acronym) to cut down on money laundering. We must verify and document where all of your funds came from. That being said, there is a very specific process for sourcing gift funds. If the funds have already entered the borrower’s account, the lender must obtain the donor’s bank statement showing their withdrawal and evidence of the deposit into the borrower’s account. In short, we must document the funds leaving the donor’s account and enter them into the borrower’s account.

How Lenders Process Gift Funds

If the gift funds are not deposited into the borrower’s account, the lender must obtain  verified by requesting the following:

  • certified check
  • money order
  • cashier’s check
  • wire transfer
  • or some other official check along with the bank statement showing this withdrawal
  • Meaning the donor can give a certified check to the borrower directly
  • We must document those funds leaving the donor’s account
  • The donor can give a certified check written out to the title company
  • But the lender must verify where those funds came from

FHA Guidelines On Gift Funds In Form Of Gift Of Equity

What if the gift is in the form of equity? This is called a gift of equity.

For more details please see our GIFT OF EQUITY BLOG

One key aspect of a gift of equity is equity may only be given to the borrower from a FAMILY MEMBER. So, the home would need to be sold from one family member to another. The documentation is very similar to gift funds when utilizing a gift of equity.

FHA Guidelines On Gift Funds on Documents Required

Below is the documentation required:

  • The lender must obtain a gift letter signed by both parties, the donor and the borrower.
  • In that letter the following information must be present;
  • The donor’s name, address, and telephone number
  • The Donor relationship to the borrower
  • The dollar amount of the gift of equity
  • A statement that no repayment will be required

Importance Of Documents In The Mortgage Process

More and more borrowers seem to be utilizing gift funds from family members to close on their dream house. As we know there has been a trend of Americans saving less and less, and home values on the rise, creating a surge in gift fun use. We are here to help with any related mortgage questions 7 days a week. Feel free to call or email us anytime! Just like anything in the mortgage process, documentation is key. The lender must be able to prove the gift funds came from an acceptable donor and from an acceptable source. Gustan Cho Associates are experts in the use of gift funds, so please contact us with any questions. If you need any clarification on acceptable sources or acceptable donors, please call Mike Gracz at 630-659-7644 or text for a faster response. Or send an email to [email protected].

This BLOG On Gift Funds Guidelines was updated on March 5th, 2022