The FHA loan program has become one of the most popular forms of mortgage financing among first-time home buyers. One of the benefits of this program is that it allows borrowers to obtain their down payment funds in the form of a gift. The money can be donated from a friend, family member, employer, or an approved nonprofit agency or charity.
But it must truly be a gift, and you must obtain a letter from the donor to this effect. Here are the minimum requirements for FHA down payment gift letters in 2014, along with a letter template you can use to get started.
Minimum Requirements for FHA Gift Letters
Borrowers who use gifted funds to cover their down payments and/or closing costs for an FHA loan must obtain a gift letter. This letter must be included within the loan application file prior to closing. In addition, the lender must verify the transfer of funds as explained below.
At a minimum, the FHA gift letter must include:
- the name of the person donating the money,
- the donor's address and phone number
- the donor's relationship to the borrower / home buyer
- the dollar amount being donated, and...
- a statement that no repayment is expected.
Those are the minimum requirements for FHA down payment gift letters in 2014, according to official HUD guidelines.
It bears repeating. The money given to the borrower must truly be a gift. The letter must clearly state that the donor does not expect any form of repayment from the borrower. In other words, it cannot be a short-term loan used to cover mortgage-related expenses. Gifts are an acceptable source of down payment and closing-cost funds for FHA loans. Short-term loans, however, are not an acceptable source. The mortgage lender must verify that the funds were not obtained through any new form of debt (i.e., a loan). If the money comes in the form of a new debt obligation, it will not be acceptable for down payment purposes.
Mortgage lenders are also required to verify the deposit and withdrawal of the gift money being used for down payment or closing costs. They typically do this by obtaining withdrawal documents, bank statements, and deposit slips that show the transfer of funds. In other words, lenders must obtain and verify the paper trail that shows where the money came from, prior to closing.
Those are the minimum requirements for FHA gift letters. All of these guidelines are spelled out in HUD Handbook 4155.1, chapter 5, section B. If you want to learn more about acceptable sources of borrower funds (where FHA loans are concerned), you should refer to this particular handbook. You can find it online with a Google search. It explains all of the requirements mentioned above, as well as additional information about funding sources. The Department of Housing and Urban Development (HUD) manages the FHA loan program. So they are the official source for rules, requirements and guidelines for borrowers.
A Basic Letter Template for Borrowers
An FHA down payment gift letter does not have to be fancy or complicated. As mentioned above, there are a few simple requirements for these letters. It must include the donor's name, address, phone number, and relationship to the borrower. It must include the dollar amount that is being provided to the borrower. And it must state that the donor does not expect any form of repayment. Here is an FHA gift letter template that meets all of these minimum requirements. *
June 1, 2014
To whom it may concern:
I, John Doe, of 123 Elm Street, Philadelphia, PA, have donated $4,000 to my brother Bill Doe. Bill is free to use this money for his down payment and/or closing costs on his home loan. These funds are provided as a gift. I do not expect any form of repayment.
Please feel free to contact me with any questions you have about these gifted funds.
John Doe signature
* Some lenders may require the bank account information for the account where the funds were deposited (e.g., the borrower's checking account). They do this to facilitate the verification process. The loan officer typically provides an FHA gift letter template for the borrower to pass along to the donor. Ask your loan officer for a template and any other instructions that may apply to your particular scenario.
As you can see, this FHA gift letter template meets all of the requirements listed above. It includes the donor's name. It explains his relationship to the borrower (his brother). It mentions the amount being provided ($4,000 in this case). It explains that no form of repayment is expected, and that the money is truly a gift. Lastly, it includes the donor's address and phone number, along with his signature. If your letter checks all of these boxes, the mortgage lender should find it acceptable. But again, they may have some of their own requirements as well. So ask for their input.
If you would like to learn more about FHA down payment gift letters, acceptable sources of borrower funds, and related topics, refer to Chapter 5 of HUD Handbook 4155.1. You'll find this reference on the HUD.gov website and also on our HUD requirements page.