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FHA Down Payment Gifts 101: Making them count

September 23, 2013

Saving for a down payment can be difficult for borrowers, which is why an FHA loan is a popular option. Not only does it offer a low 3.5% down payment, but 100% of that down payment can be gifted to borrowers, so they don’t have to save the money on their own.

This important option for borrowers has to be documented in the right way and come from allowable sources to qualify. Mortgage underwriters have specific directives from FHA – these rules are set up to ensure that the money is an authentic gift and not another loan that the borrower may have to repay. It protects the lender and the homebuyer from taking on too much debt.

To ensure the down payment assistance can be used, it’s imperative to understand the specific way it must be handled.

1. The donor must be a person or entity with no interest in the transaction. Typically, gifts come from a family member, but down payment assistance can come from governmental agencies and even an employer, too. The rule is that a donor may not benefit financially from the home purchase transaction (seller, real estate professional), or the gift is considered an “inducement to purchase” and does not qualify. There are narrow exceptions when the relative is the seller or a real estate agent, but you should discuss those situations specifically with the loan officer.

2. The donor must put it in writing.  FHA requires a gift letter when receiving down payment assistance. This document verifies that the buyer will not pay back the funds. It must include the cash amount of the gift; a statement confirming it is a gift and won’t be repaid, the donor’s name, address, telephone number and relationship to the borrower; and signatures from both the buyer and the donor.  When provided by a government entity, this is frequently referred to as an award letter.

3. The source of cash gifts must be documented. No matter how a donor decides to gift down payment assistance – by depositing the money up front in the buyer’s bank account or by providing a check or wire transfer at the closing, the lender must receive documentation that shows the source of the funds.

The simplest way to meet this requirement is by providing a bank statement from the donor’s account, a withdrawal slip in the amount of the gift, and a matching deposit slip, check, or wire transfer for the same amount.  Again, there are specific exceptions, but anything outside of this generally accepted process should be discussed with a loan officer in advance.

By working with a lender that is an expert in FHA loans, you can be sure that your home buyers will have the proper guidance and information to ensure their loans close on time.


Handbook 4155.1: 5. B.5.a-b

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