Buying a home is a special time for many. As a goal, it ranks near the top with getting married, earning a great job, graduating from college, and more. Furthermore, first-time home buyers are looking to move from “throwing away money on rent” to turning a house into a home. Once the decision has been made to buy a home, research into home loan programs begins. Usually, buyers learn of FHA’s popularity as a solution for these first-timers. Although there is a low down payment requirement, it may still pose a challenge. That is where FHA gift funds could help buyers cross the finish line into home ownership.
FHA Gift Funds Defined
Dictionary.com defines a gift as something given voluntarily without payment in return, as to show favor toward someone, honor an occasion, or make a gesture of assistance. Even though buying a house is not the dictionary’s primary thought here, the definition fits perfectly. FHA basically defines a gift as a contribution of cash or equity from a donor to a borrower with no expectation of repayment. Plus, the gift may only come from specific, allowed sources and the gift must be documented. FHA guidelines provide for an allowed donor to assist a borrower by gifting assets towards the qualification of an FHA purchase or refinance.
Furthermore, a gift means a gift. In the dictionary, it mentions “given voluntarily without payment in return” and this is key. Borrowers should not cover up an “under the table” personal loan by calling it a gift. Right on the official gift letter, they normally state this line “no repayment of this gift is expected or implied.”
Gift Fund Uses
FHA allows a gift to help a buyer purchase a home. So, what contribution does a gift play in this qualification process? Good question and it is not exclusively down payment. The 3 main buyer uses for gift funds include:
- Down payment
- Closing costs
- Paying off debts
FHA loans require a down payment equal to 3.5% of the purchase price. Additionally, buying a home with a mortgage comes along with closing costs. Often, the combination of these may be too much for a first time or even repeat buyer. FHA gift funds may be contributed to the down payment, closing costs, or even both. Additionally, when a buyer’s debt to income ratio is too high or a collection must be paid off to qualify, FHA gift funds may come to the rescue!
For a better understanding of closing costs and purchase strategies, check out another of our articles, “Who pays closing costs?”
Can Anyone Provide Gift Funds?
FHA gift funds guidelines have become more defined in this area. Previously, a second cousin twice removed (or however that works) could gift funds, but now FHA has the following list and sticks to it in order to make sure that there is a clearly defined relationship.
- Borrower’s family member
- Employer or labor union
- A close friend with a clearly defined and documented interest in the borrower
- Charitable organization
- A governmental agency or public entity that has a program providing homeownership assistance to low or moderate income families or first-time homebuyers
One of the most important rules is that an interested party to the transaction may not provide the gift. This includes the seller, lender, Realtor®, or builder.
Exceptions to Interested Party Gift Rules
The purpose of the interested party rules is to ensure that the seller is not propping up a buyer to appear stronger than they really are, but there are exceptions for who may provide the gifted down payment.
Realtor Who Is a Relative May Gift Commissions to Buyer
Buyers considering Realtor® choices will often go with family members. Just think, trust is a major factor in buying a home. So, buyers turn to their real estate agent family member. There is another potential advantage to choosing a family member as a Realtor®. Even though the Realtor is an interested party to the purchase transaction, part or all of the commission may be provided to the buyer as a gift!
That’s pretty neat because technically the funds are not available until the deed is recorded. The commission to be paid must be proven up-front, a gift letter provides the details, and the commission may be used for down payment, closing costs, or paying off a debt. On another note, a Realtor® buying his/her own home may use the commissions paid as his/her own down payment or closing cost funds.
As a buyer, that will get the thoughts flowing for which family member is a local Realtor®!
Gift of Equity Purchase Rules
Sometimes, the house you want is closer than you think. Looking online and choosing a Realtor® is not necessary. The reason is that parents, siblings, aunt, uncle, or others may be selling a great house. That is a great opportunity to buy a home from a trusted family member and also probably know the home’s history.
Although, a huge benefit happens when the home is offered at a discounted price. The reason is the seller may gift the equity in the property as a down payment to the related buyer. Thus, if the property is worth $200,000 and the seller only wants $175,000, the $25,000 equity may be gifted as a down payment. Not only can the seller gift the down payment, but the seller may also pay the closing costs. Resulting in a true no money down purchase for the buyer.
Keep in mind, only actual family members may provide equity as a gift when selling to another family member. So, an LLC, trust, or other entity may not provide a gift of equity.
Learn more about using a gift of equity here.
Let’s say a gift will be used to buy the home. FHA gift funds rules stipulate that the relationship and terms must be specified on a gift letter. FHA is very specific in these requirements.
Gift letter requirements include:
- Donor’s name, address, & phone number
- Donor’s relationship to the borrower
- Amount of the gift
- Statement that no repayment is required
- Signatures and date by both donor(s) and borrower(s)
Although FHA lenders have a formal FHA gift letter, the donor and borrower may usually write up their own gift letter. Either way, the above requirements must be included. It is best to just use the lender’s form.
FHA Gift Funds Tips
- Do not gift cash
- Funds must be documented – consult your loan originator
- Talk to your family member about requirements
- Gift funds may be used in conjunction with down payment assistance programs
- Most importantly, discuss options, requirements, and solutions with your loan originator!