FHA Gift Funds - Limits, FAQs, and Guidelines for Homebuyers

If you hope to buy a home with an FHA mortgage loan, gift funds from family or others can significantly help cover your down payment and closing costs. The FHA allows gift funds under certain conditions, making homeownership more feasible for many buyers. In this comprehensive guide, we'll explore common questions around FHA gift funds so you can utilize them properly when purchasing your home.

What are FHA Gift Funds?

To help with your FHA mortgage down payment, closing costs, or other related expenses, you may be eligible to receive gift funds from a relative, employer, nonprofit organization, or other qualified party. This gifted money does not need to be repaid. With an FHA loan, you can use 100% gift funds for your entire down payment if it meets the required minimum of 3.5%. Gifts can be from immediate family members, a future spouse, an employer, a church, a community group, or a government agency.

FHA Gift Fund Limits

The donor can gift you as much money as needed for your down payment, closing costs, and prepaid items. However, there are some limits:

The minimum down payment is 3.5%. Gifts can cover the entire down payment if it meets or exceeds this percentage.
Gifts must be documented. The donor must provide a gift letter stating no repayment is required. Supporting documentation may also be needed.
No undisclosed interested parties; gifts cannot come from those interested in the sale, like the seller, real estate agent, or builder.
Gift funds are not reserves. While gifts can fund your down payment, you'll still need separate accounts to meet FHA requirements.

If you receive a sizable gift, the lender may ask for additional verification to confirm sufficient assets and no undisclosed loans or debts tied to the funds. But in general, the FHA does not limit how much gift money families, employers, or other eligible parties can provide.

Gift Fund Sources: Who Can Gift You Money?

To use gift funds with an FHA mortgage, the donor must be:

Family member: This includes spouse, child, parent, sibling, grandparent, aunt or uncle, cousin, domestic partner, fiancé, or future spouse.
Employer or labor union: Some employers offer down payment assistance programs as an employee benefit.
Charitable organizations, nonprofits, and some municipalities have gift fund programs for low-income buyers.
Government agency: Special FHA-approved government down payment programs exist in some areas.

The donor cannot be an interested third party to the transaction, like the seller, real estate agent, mortgage lender, or contractor. There are exceptions if it's a documented family member or domestic partner.

Gift Fund Documentation Requirements

It would be best to document where the money came from to use gift funds for your FHA mortgage. Here's what's required:

The signed gift letter states the funds are gifts with no expected or implied repayment. It must include the donor's name, the gift amount, your name, your relationship with you, and the donor's contact information and signature.
Proof of transfer: The lender will verify the gift money was transferred to you via your bank statements, a copy of the cashier's check, a money order, a wire transfer confirmation, or other evidence showing you received the funds.
Donor bank statements: Your lender may request 1-2 months of the donor's bank statements showing sufficient funds to provide the gift and no deposits outside their regular income.

Proper documentation prevents delays in getting your FHA mortgage approved with gift funds. Most lenders provide gift letter templates to help streamline the information required.

Can Gift Funds Pay Closing Costs?

Yes, using FHA gift funds for closing costs and the down payment is acceptable. Closing costs may include origination fees, appraisal fees, prepaid interest, property taxes, homeowner's insurance, title fees, etc. The donor must specify in the gift letter if the money is for your down payment, closing costs, or both.

Gift Funds vs. Gift of Equity

One common confusion is the difference between gift funds and a gift of equity. With FHA gift funds, the donor provides you with cash to put toward your mortgage. A gift of equity is when a family member sells you the home below market value as a gift to subsidize the purchase. Make sure to clarify which gift option your family member may be providing.

Tips for Documenting FHA Gift Funds

Taking a few key steps when documenting FHA gift funds will help avoid issues or delays:

Review gift documentation requirements beforehand so you and the donor can provide all needed paperwork.
Have the donor prove the gift funds did not come from an undisclosed loan. Their bank statements should show the money did not recently come from another source.
Use the lender's gift letter template and carefully fill in all the required information.
Be consistent across all documents about who is gifting you the money and the gift amount.
Provide bank statements showing the gift money was deposited into your account, matching the amount in the gift letter.
Keep documentation organized for a smooth mortgage process.

Gift Fund FAQs

Here are answers to some other common questions homebuyers have about FHA gift funds:

Can the seller or real estate agent gift me money for the down payment?
No. Gifts cannot come from interested parties to the transaction, like the seller, agent, builder, or contractor. This is an FHA restriction to avoid conflicts of interest.

If my parents gift me money, do I need to disclose its source?
Yes. Your lender will require documents like bank statements to verify that your parents had the funds available and did not take out an undisclosed loan on your behalf. Gift funds must be shown as coming from an acceptable source.

Can I take out a personal loan to use as a gift for myself?
No. You cannot take out a loan to gift yourself the money for your mortgage down payment. All FHA gift funds must be able to be documented as coming from one of the eligible donor sources. Undisclosed loans are not allowed.

Is a gift letter mandatory to use gift funds with the FHA?
Yes, an acceptable gift letter is required for your lender to apply gift funds toward your down payment or closing costs on an FHA loan. This verifies that it is a true gift with no expected repayment or financial obligation to the donor.

Does the gift letter need to specify my home purchase?
Your gift letter should state the funds for purchasing your specific home if it is already under contract. However, a general letter works, too, if given before identifying the property.

Conclusion

As you navigate the ins and outs of FHA gift funds, be sure to connect with knowledgeable mortgage loan officers. They can provide trusted guidance and resources so you can adequately document gifts for your new home. With the proper preparation, FHA gift funds can make the dream of homeownership a reality.

SOURCE:
Section B. Acceptable Sources of Borrower Funds
https://www.hud.gov/sites/documents/4155-1_5_SECB.PDF
https://www.rockethomes.com/blog/home-buying/mortgage-basics/fha-gift-funds