FHA Gift Funds: Definition And Guidelines

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:

• The home must be your primary residence, and you must occupy it within 60 days of the closing  
• An inspection must take place and the home meets minimum property standards
• Borrowers must pay for mortgage insurance premium (MIP)
• An FHA-approved appraiser must appraise the home 
• Borrowers with credit scores above 580 must put at least 3.5% down
• Borrowers with credit scores between 500 – 579 must put at least 10% down (Rocket Mortgage® requires a 580 minimum credit score)

Keep in mind that your debt-to-income ratio, income, and loan amount play a role in your qualification as well.

Gift Funds Vs. Gift Letters: What’s The Difference?

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.

Receiving FHA gift funds can make it easier to qualify for an FHA loan but you must follow a particular process for eligibility. First, the money cannot be a loan by any means. It has to be a gift with no scheduled repayment.

Whoever provides the gift funds should have a specified reason for giving the funds. This way, the lenders know it isn’t a loan acting as a gift. In addition, you’ll need to keep bank statements from the donor and the borrower, documenting the flow of funds and how long they have been in each party’s account. The bank statements will provide proof of the exchange of assets.

Donors can choose to give either cash or equity as gift funds. When they give cash, the transaction is pretty straightforward. However, when a donor gives a gift of equity, the donor sells their home to the borrower at a lower price than what the home is worth. Then the borrower can use the equity in the home for a down payment or other housing costs.

For example, let’s say a donor sells their home to a family member for $200,000 but it’s worth $300,000. The borrower would have direct access to $100,000 of equity to use as they wish. They can do so in the form of a home equity loan or a home equity line of credit, which lets you take money out of the home to use toward something else like a renovation. But, in this case, it would be considered a down payment credit for FHA loan approval. 

To qualify for an FHA loan, you must meet the FHA loan requirements as well as the FHA gift fund guidelines. FHA guidelines for gift funds include:

• Gift funds must be from an acceptable source such as savings accounts, stocks, or savings bonds
• Gift funds must be verified entering into a borrower’s bank account and leaving the donor’s bank account
• Documentation showing proof funds are not a collateralized loan such as an FHA gift letter 

Keep in mind you may have to provide additional supporting documentation depending on how you choose to use your FHA gift funds. 

Who Can Give Gift Funds On An FHA Loan?

Receiving a gift fund for an FHA loan can’t come from just anyone. The FHA usually places restrictions on who can and cannot gift funds. The approved list of appropriate donors includes:

• Borrower’s family member
• Borrower’s employer or labor union
• A close friend with a clearly defined interest in the borrower
• A charitable organization
• A governmental agency assisting low/middle-income families or first-time home buyers

You cannot receive the gift from anyone invested in the property purchase transaction. Such as:

• The seller of the property
• Real estate agents
• The lender
• The home builder

Coming up with a down payment for a home can be one of the most stressful parts of buying a property. FHA gift funds can help. If someone is willing to gift you the money to cover the down payment, closing costs, or cash reserves, make sure you follow the FHA guidelines. You also want to ensure you have enough money coming in to support your monthly mortgage payments. Once you make sure you have enough funds for the home purchase, it’s time to get preapproved for an FHA loan. Get approved with Rocket Mortgage today!