Are you currently in the process or thinking of buying a home with an FHA loan, and wondering who can pitch in on your down payment or closing costs? Well, there are actually quite a few people and organizations that can provide gift funds to assist with your home purchase.
You can use gift funds to offset the down payment costs of your FHA loan and fasten the process of buying your new house. It’s important, however, to understand the rules around who can give them. So sit back, relax, and let’s explore the world of gift funds for FHA loans.
This article details all the information you need about who can give you gift funds and any restrictions you should be aware of.
Who Can Be an FHA Gift Donor?
Not everyone can give a monetary gift for an FHA loan. FHA has very strict guidelines on who can give a gift, and that’s understandable.
For example, the seller of the property you intend to buy cannot be a gift donor to help you with your closing costs or down payments—that obviously creates more loopholes and problems than solutions.
Here are the approved groups of people, per Chapter 5 of the HUD 4155.1 handbook, that can be FHA gift donors:
Family members
The most common source of gift funds for an FHA loan is from family members. This includes parents, grandparents, siblings, and even cousins.
However, it’s important to note that the FHA has specific rules around what constitutes a “family member.”
But generally, anyone who is related by blood, marriage, adoption, or legal guardianship is considered a family member.
Close friends
If you don’t have any family members who are able to give gift funds, you can receive them from close friends.
However, the FHA has strict guidelines around this and insists, that your friend must have a “clearly defined and documented interest” in you.
This means that they must be able to demonstrate a long-standing relationship with you and a good reason for giving the gift.
Employers
Besides family and friends, it’s also possible for an employer to give gift funds for an FHA loan. Again, there are restrictions around this.
The employer must be able to demonstrate that the gift is not tied to any future employment or business relationship with the borrower.
Charitable organizations
Finally, some charitable organizations may be able to provide gift funds for an FHA loan.
The organization must be a qualified non-profit organization and must not have any financial interest in the transaction.
Can FHA Loan Down Payments be a Gift?
Yes, FHA loan down payments can be a gift.
In fact, gift funds are a popular way to help with the down payment on an FHA loan. Using your gift to pay for your down payment reduces your overall costs and gets your loan application approved with little hassle.
Down payments are one of the major differences between USDA loans and FHA loans. Unlike the latter, USDA home loans and USDA construction loans include no down payments.
In contrast, here are some of the things an FHA gift fund cannot be used for:
- Gift funds cannot be used to pay off any debt that is not related to the home purchase. This means that you cannot use gift funds to pay off credit card debt or student loans, for example.
- Gift funds cannot be used as reserves. Reserves are extra funds that you are required to have on hand after closing on your home in case of unexpected expenses or financial hardships.
FHA Loan Down Payment Gift Requirements
Away from all the donor-specific restrictions for an FHA gift fund, there are other requirements you must follow if you plan to use gift funds for your down payment.
The Federal Housing Administration (FHA) has established guidelines on who can provide gift funds and how they can be used. Be sure you follow these requirements carefully to ensure a smooth transaction process.
Here are some of the requirements to keep in mind:
- The gift donor must be a person or entity that is approved by the FHA. The acceptable sources of gift funds include family members, close friends, employers, and charitable organizations.
- All gift funds must be properly documented and sourced. The funds must come from an approved source like savings bonds, stocks, or savings accounts. You will also need to show proof of transfer of funds from the donor’s account to your account.
- FHA gift letter. The donor must provide a written statement confirming that the funds are a true gift and do not require repayment.
In addition, if you’re considering an FHA 203k loan to finance your home renovation project, it’s important to understand the specific requirements for using gift funds. The FHA 203k loan program allows borrowers to finance the cost of home improvements into their mortgage, but there are strict guidelines around how the funds can be used and what repairs are eligible.
FHA Loan Gift Letter Requirements
If you’re lucky enough to have someone willing to give you a gift for your FHA loan down payment, there are a few things they’ll need to do in addition to transferring the funds to your account.
Specifically, they’ll need to provide a written statement confirming that the funds are a genuine gift and that you won’t need to pay them back. It is a bit of a hassle, but it’s an important step in the process, and it helps ensure that everyone is on the same page.
The loan gift letter, as referred to by the FHA, must include:
- The donor’s name, address, and phone number
- The donor’s relation to you
- The amount of the gift
- A statement that the funds are a gift and do not require repayment
- The source of the funds (e.g. savings account, stocks, etc.)
- The date the funds were transferred to your account
Frequently Asked Questions
Who can be an FHA gift donor?
Eligible FHA gift donors include family members, close friends, employers, and charitable organizations, each with different qualifying conditions.
In contrast, the seller of the property, real estate agent or broker, lender, and builder of the property cannot be gift donors.
Can FHA gift funds come from a friend?
Yes, close friends can give an FHA gift if they can establish that they are a long-standing close friend and they have a “clearly defined and documented interest” in you. They must also clearly state why they want to give you this gift.
Can a cousin provide gift funds on an FHA loan?
Yes, a cousin can provide gift funds for your FHA loan, provided they are related to you by blood, adoption, or marriage.
Should I Get Gift Funds for My FHA Loan?
If you can, absolutely. A gift fund is a great way to reduce your costs and receive support from those close to you in your homeownership journey.
For anyone considering an FHA loan and hoping to receive gift funds for your down payment, take time to understand who can give them and what rules apply.
While FHA loans allow gift funds from certain sources, there are restrictions on who can give them and how they can be used. It’s important to do your research and work closely with your lender to ensure you meet all the necessary requirements for a successful refinancing with an FHA loan.
In addition, work closely with your lender and document everything carefully to ensure eligibility, following FHA guidelines.
If you have any questions or want to discuss anything with us, don’t hesitate to give us a call. Also, if you’re not sure if you qualify for an FHA loan, check out our detailed FHA loan requirement guide to determine your eligibility for free.
We’re here to help you make your homeownership dreams a reality!
