This article will cover FHA guidelines on gift funds mortgage requirements on home purchase transactions. We will also discuss changes to FHA guidelines on gift funds mortgage requirements. The Federal Housing Administration, often referred to as FHA, is part of the United States Department of Housing and Urban Development, often referred to as HUD.
HUD is not a 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. HUD’s main function and role is to insure mortgage loans to banks and lenders who are FHA approved and meet all FHA mortgage lending requirements.
By insuring the FHA loans, in the event borrowers who have an FHA loan ever default and the lender takes a loss when the property gets foreclosed, HUD steps in and will insure the loss the lender who took a hit on, For HUD to insure loans, all FHA loan applications need to meet all of FHA guidelines on gift funds mortgage requirements if gift funds were used.
HUD 4000.1 FHA Handbook For FHA Loans
On September 14, 2015, FHA came out with its newest lending guidelines called HUD’s FHA 4000.1 Handbook.
HUD 4000.1 FHA Handbook details all of the lending requirements mortgage lenders need to follow and abide by for HUD to insure the loans they originate and fund. New FHA guidelines on gift funds mortgage requirements are part of the new guidelines HUD came up with.
Under FHA guidelines on gift funds mortgage requirements, HUD allows home buyers to get 100% gifted funds for the 3.5% down payment requirement on home purchases.
FHA Guidelines on Gift Funds Mortgage Requirements and How Does It Work?
FHA guidelines on gift funds state that home buyers can get 100% gift funds to purchase their home. There are strict rules and regulations with FHA guidelines on gift funds mortgage requirements. First, gift funds can only be used for down payments and closing costs.
Homebuyers cannot use gift funds for reserves that lenders require. Reserves are 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 need to be the homebuyer’s funds and cannot be gifted. Asset accounts that can be used for reserves include IRA retirement accounts, 401k retirement accounts, savings accounts, CDs, and investment securities accounts.
There is no requirement that reserves be escrowed with the title company. However, reserves will not just be verified at the beginning of the mortgage loan application process but also by the mortgage underwriter issuing a clear to close.
How Do Lenders View Gift Funds
Although FHA allows 100% gift funds to be used for the down payment and closing costs, lenders do not view gift funds favorably, especially the Automated Underwriting System.
There are so many cases where borrowers with low credit scores and poor credit history but do meet the mandatory minimum FHA guidelines will not get an automated underwriting system approval if they get 100% gifted funds for their down payment.
If gift funds are removed from the mortgage loan application, the Automated Underwriting System will render an approve/eligible per the Automated Underwriting System. In cases like these, we need to remove the gift funds and have the borrower come up with his or her own funds.
Strategies For Avoiding Gift Funds To Be Used For Down Payment
When borrowers cannot get approve/eligible per the automated underwriting system due to getting gift funds for the down payment or closing costs. Borrowers will get approve/eligible when the gift funds are not used.
There are certain strategies that we can use where 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 two-month bank statement printouts and have those pages signed, dated, and stamped by the bank teller.
Borrowers 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 letting it season for 60 days.
Understanding FHA Guidelines on Gift Funds Mortgage Requirements
Homebuyers get gift funds for the down payment on a home purchase, the donor needs to sign a gift letter. A gift Letter, which will be provided to borrowers by lenders, states that the gift funds are solely a gift for the home purchase down payment and closing costs. 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. Regardless, that rhetoric 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. All funds in the donor’s bank account need to be sourced. The gift funds leaving the donor’s account into the homebuyer account need 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.
January 28, 2023 - 4 min read