The Federal Housing Administration offers home loans with a minimum down payment of 3.5% and allows the borrower to receive funds as a gift from an approved source making home buying even more affordable. ​​Nevertheless, applying for an FHA loan can be a daunting task if you're not familiar with all the rules and regulations. One of the most important things to know is that you cannot use just any type of gift funds towards your down payment or closing costs. The rules of FHA gift funds may seem strict, but they protect both the borrower and the lender. So if you're thinking of applying for an FHA loan, keep on reading our FHA gift funds guide before moving forward.

What is a gift fund in mortgages?

A gift fund for FHA loans is a sum of money given to a borrower to help them with their mortgage expenses. Gift funds can come from family members, friends, or charities, and can be used for a purpose related to the purchase of a home. Specifically, FHA gift funds can be used for certain expenses: 
  • Down payment
  • FHA closing costs 
  • Any financial reserves that are required for loan approval. 
Borrowers are not able to use gift funds to cover their monthly mortgage payments or any other ongoing expenses. Gift funds can be an important source of financial assistance for borrowers who struggle to afford a home. And In some cases, this is the only way for a borrower to come up with the necessary down payment. 

How do FHA gift funds work?

This is how FHA gift funds work - the process is simple:
  1. The donor is giving you money as a gift. 
  2. This money is to be used towards the purchase of your home with no expectation of repayment from you - the recipient. 
  3. You will deposit this gifted money into your bank account. 
  4. Once the gifted funds are in your account, you can then proceed to get loan approval and move forward with closing on your new home.
If someone offers to give you money for your down payment, make sure they write a little gift letter stating their intentions. This will help avoid any confusion (or worse - legal trouble) down the road.  An FHA gift letter must include the following information:
  • Donor’s name and contact information
  • Address of property you’d like to buy
  • Donor and buyer’s relationship
  • The amount of gift funds
  • Date of transfer
  • A statement that repayment isn’t expected by the donor
  • Donor’s financial information, such as bank/account number, and type of account
  • Donor’s signature
Once completed, the gift letter should be provided to your lender to proceed further. 

Who can gift funds for an FHA loan?

According to HUD 4000.1, gift funds may be provided by:
  • The borrower's family member
  • The borrower's employer or labor union
  • A close friend with a clearly defined and documented interest in the borrower
  • A public entity or a governmental agency or public entity that has a program for low-income families or first-time homebuyers
  • Any charitable organization
If you do receive gift funds to help with your down payment, keep in mind that there are certain rules. For example, the donor may not be a person or entity with an interest in the property sale, such as:
  • The property seller 
  • The real estate agent, broker, or lender
  • The builder, or any other associated organization related to the property transaction. 
This requirement prevents potential conflicts of interest that could affect the outcome of the loan. 

[su_note note_color="#ffffff" text_color="#000000" radius="0"]Are you ready to buy a home?  [su_button url="https://alexshekhtman.floify.com/apply-now" target="blank" style="flat" background="#0072ff" size="4" radius="round" icon="icon: home" icon_color="#ffffff"]Get pre-approved[/su_button] [/su_note]

FHA gift funds guidelines

To start using gift FHA funds, a lender will need to see some form of documentation required to verify that the funds are coming from a legitimate source. The documents may include a bank statement, a copy of the deposit slip, or a letter from the donor.  If you're using gifted funds for your down payment, ask the donor for these documents to avoid any delays in your loan approval process. And, of course, if you're in doubt, feel free to consult with a qualified real estate mortgage broker, LBC Mortgage. We will guide you through the process and ensure everything is done properly and by the book.

FAQs

What is a gift of equity?

A gift of equity is a transaction between family members in which the seller agrees to accept a purchase price that is below the fair market value of the property in order to help the buyer with their down payment. In order for the child to be eligible for this type of gift, the buyer should purchase the property as their primary residence and have the financial ability to make all the monthly mortgage payments. 

Can I use FHA gift funds for a down payment?

In short, yes, you can. For borrowers who use FHA loans to purchase a home, gift funds may be an acceptable source of funding for the down payment, closing costs, or reserves required for loan approval. 

How much money can be used as gift funds?

When it comes to making gifts, donors have a lot of leeway in terms of how much they can give without incurring any tax implications. For instance, a taxpayer can give up to $16,000 in 2022 without having to pay any gift taxes. However, it's important to note that this limit is per recipient - so if a donor wants to give more than $16,000 to one person, they will have to pay gift taxes on the portion of the gift that exceeds that amount. Additionally, gifts of any size may have tax implications for the donor if the donor is subject to estate taxes. 

Should an FHA mortgage gift be repaid?

It's important to understand that mortgage gift funds are a true gift and not a loan. The donor cannot ask for the money to be repaid, and if they did, it would put the borrower in violation of their loan agreement. 

Conclusion

Buying a home is a major financial investment, and there are a number of ways to finance the purchase. Mortgage gifts are a great way to get help from loved ones when buying a home. If you're considering this option, it's important to be aware of the guidelines set by the Federal Housing Administration. LBC Mortgage is happy to provide a free consultation to help you understand the guidelines and determine if using gift funds is right for you. We'll also answer any other questions about the home-buying process. Contact us today to get started.