We have started a new blog-post series that will answer some of the most frequently asked questions relating to FHA-insured mortgage loans. Today’s question is: Can my FHA down payment be gifted from a family member in 2017?
Can My FHA Down Payment Be Gifted?
The short answer is yes, in 2019 the minimum required down payment for an FHA loan (which is 3.5%) can be gifted from a family member, a friend, an employer, or some other approved source. This is all spelled out in HUD Handbook 4000.1, the Single Family Housing Policy Handbook.
With that simple answer out of the way, let’s take a more in-depth look at FHA down payment gift rules and procedures.
According to the Department of Housing and Urban Development, which manages the FHA loan program, borrowers must make a minimum down payment of 3.5% when using this program. Specifically, that’s 3.5% of the home’s purchase price or appraised value, whichever is less. This relatively low down payment is partly what attracts people to the program in the first place.
The good news is that this upfront investment does not have to come out of the home buyer’s pocket. The FHA down payment can be gifted from a family member or other approved donor, as defined by HUD guidelines and requirements for 2017. This is partly why this program is so popular with moderate and low-income borrowers (though it’s certainly not limited to this group).
No Expectation of Repayment
In the FHA policy handbook, HUD defines a gift as “contributions of cash or equity with no expectation of repayment.”
Those last four words are critical. If a family member, employer, or other approved donor provides you with funds for your mortgage down payment, there must be no expectation of repayment. In other words, the gifted funds must truly be a gift, and not a loan.
You can have the money gifted to you, but you cannot borrow it from someone else.
Family Members, Friends, Employers, Charities
According to HUD Handbook 4000.1, FHA down payment gifts may be provided by:
- a member of the borrower’s family;
- the borrower’s employer or labor union;
- a close friend who has a “clearly defined and documented interest” in the borrower;
- a charitable organization;
- a governmental agency or public Entity that has a program providing homeownership assistance to (A) low or moderate income families; or (B) first-time home buyers.
It is our understanding that the seller can contribute money toward the buyer’s closing costs, but not toward the down payment. HUD considers the seller, real estate agents, builders and developers to be “parties with an interest in the transaction.” And these interested parties may not contribute money toward the borrower’s minimum required investment, or MRI. This is according to HUD Handbook 4000.1 (page 232).
Gift Letter Requirements
So we’ve answered the primary question: Can my FHA down payment be gifted from a third party? The answer is yes, as long as the person donating the funds is included in the list of approved donors above (and also contained within the HUD handbook).
There are additional requirements for FHA down payment gifts in 2017. The mortgage lender who is funding the loan must obtain a “gift letter” from the person who is gifting the money to the borrower. At a minimum, this letter must state that the donor does not expect any form of repayment, as stated above. It must also disclose the nature of the relationship.
Documenting the Transfer of Gifts
If you have some, or all, of your down payment gifted to you from a third party, the mortgage lender must properly document the transfer of funds prior to closing. There are specific requirements for this as well, as outlined below.
The following gift-letter documenting requirements come straight out of the HUD Handbook 4000.1:
- If the gifted funds have already been verified in the borrower’s account, the mortgage lender should “obtain the donor’s bank statement showing the withdrawal and evidence of the deposit into the borrower’s account.”
- If the FHA down payment gift funds are not verified in the borrower’s account, the mortgage lender should obtain the certified check, money order, cashier’s check, wire transfer, or other official check, along with a bank statement that shows the withdrawal from the donating party’s account.
Sometimes, the FHA down payment gift funds are paid directly to the settlement agent. In such cases, the lender must verify that the agent received the gifted funds from the donor. The mortgage lender must also ensure that the funds were gifted from an acceptable source, as outlined above.
If documentation from the bank or other savings account is not available, the lender “must have the donor provide written evidence that the funds were borrowed from an acceptable source, not from a party to the transaction.”
Again, all of this is straight from the Single Family Housing Policy Handbook (4000.1). If you have additional questions about this subject, you should refer to the official policy handbook for answers.
Getting back to the question at hand: Yes, your FHA down payment can be gifted from a family member, a friend, an employer, etc. — as long as you meet the requirements outlined above, and any other gift rules and requirements specified by HUD.
An FHA-approved mortgage lender should be aware of all these requirements, by the way. So they can guide you through the process.