Is it your dream to buy a home, but you don’t have the cash available for a down payment? Receiving gift funds is a popular way to get approved for financing through an FHA mortgage. However, if someone gifts you money for your FHA down payment or closing costs, you must abide by the rules and regulations of an FHA loan. So, if you think FHA gift funds could be a viable solution to homeownership, here’s what you need to know.
FHA gift funds are assets given from a donor to a borrower via cash or equity with no expectation of repayment. Essentially, borrowers can use FHA gift funds toward a down payment, closing costs, or housing reserves to qualify for an FHA mortgage.
FHA loans are non-conforming and government-backed loans, one of the many types of loans used to finance a mortgage. For folks with low to moderate-income levels, FHA loans can help them achieve homeownership. For example, FHA loans are often suitable for first-time home buyers who have limited funds for a down payment or folks who have a significant amount of outstanding debt.
Usually, FHA loans have less stringent approval criteria than you would find with a conventional loan. For example, FHA loans typically have lower credit score requirements.
Typically, FHA loan requirements include:
Keep in mind that your debt-to-income ratio, income, and loan amount play a role in your qualification as well.
Gift funds are monies given to a borrower to help with a home purchase. For FHA loan approval, borrowers can use the gift funds for a down payment, closing costs, or reserves needed for approval. Often, buyers assume that the lender won't care where the funds came from as long as the money is available.
The problem with that is the lender needs to know that the homeowner has the funds and means to make their regular loan payments. This is where gift letters come in. If a gift is used for a down payment or funds closing costs, the lender needs to ensure the money isn't a loan that the borrower also has to repay.
The U.S. Department of Housing and Urban Development (HUD) evaluates every borrower's ability to repay their loan by looking at their financial situation. To do so, they revive financial documents such as pay stubs, bank statements, or W2s. For example, if HUD identifies a considerable sum of cash within the last 2 months, they want to know it's not a loan; it's a gift. The gift letter proves the borrower will not need to repay the gift, and it’s free and clear to use toward a home purchase.
This letter must be written and signed (including the donor's personal information) stating that the money was a gift, not a loan.