With the American Dream very much alive, there is surely something that can be done with home down payments. FHA loans, for instance, only require 3.5% down payments. Not only that, these government-insured loans allow for gift funds to cover these down payments.
FHA gift funds are a gift themselves to first-time home buyers and those struggling with their down payments. With these gift funds, FHA loans effectively become zero-down mortgages.
Isn’t that amazing? Learn what you can do to take advantage of FHA gift funds. Let’s help you find an approved FHA lender, too.
Gift Funds and FHA Loans
First things first. FHA loans are designed to help low- and moderate-income consumers attain homeownership. These loans do that with their easy qualifying process and less stringent requirements.
One perfect example is the FHA’s minimum down payment of 3.5% of the home’s purchase price or its appraised market value, whichever is lower. This serves as the borrower’s contribution to the transaction, his/her skin in the game so to speak.
Funds for this down payment don’t have to come from the borrower’s pockets, however. The FHA allows the use of gift funds to cover the down payment, closing costs and fees, and/or reserves, as applicable.
Gift Funds as an Acceptable Source of Down Payment
For gift funds to be considered as an acceptable source of down payment by the FHA, keep in mind these three important things:
1. The gift fund must be a gift from the donor to the borrower with no implied or expected repayment.
2. By donors, they could be the borrower’s (i) relative, (ii) close friend with a clearly defined and documented interest in the borrower, and (iii) employer or labor union.
Charitable organizations and government agencies or entities that provide homeownership assistance to first-time homebuyers and low- and moderate-income families are also eligible to become gift fund donors.
3. The seller, the real estate agent, the contractor or the loan officer is not allowed to make gift funds. Amounts coming from these interested parties to the sale will be considered inducement to the transaction and will be subtracted from the sales price.
Making the Gift Letter
To document any gift funds, the borrower will submit a gift letter from the donor. This gift letter must contain the name, address and contact number of the donor, the dollar amount of the gift, the donor’s relationship to the borrower.
The donor must explicitly state in the letter that the gift requires no repayment as in this example.
Documenting the Transfer of Gift Funds
It’s important for the FHA to verify that the gift funds were the donor’s own funds and not from an unacceptable source.
(i) That the money does not come from an interested party to the sale.
(ii) In case the donor took out a loan for the gift fund, the borrower is not obligated to repay the debt incurred.
The lender is tasked to document the transfer of the gift money from the donor to the borrower. To establish this paper trail, the following documents may have to be furnished to the lender:
- Withdrawal slip showing that the money came from the donor’s account
- Deposit slip and bank statement showing that the money was deposited to the borrower’s account
- Bank statement showing that the money came from the donor’s account
- Copies of canceled check showing the amount of the gift
- Documentation of wire transfer from the donor
- Written evidence that the money has been borrowed by the donor from an acceptable source. Cash on hand is not an acceptable source of donor gift funds.
The documentation of the transfer of funds differs depending on whether the funds were transferred to the borrower’s account or to be provided at closing.
The gift of down payment is probably one of the best things you can receive this Christmas. Consider how FHA gift funds can help you buy your dream home.