FHA Gift Fund Guidelines

Trying to come up with the cash to cover your down payment and closing costs when buying a home can feel overwhelming, but FHA loans offer a helpful solution: the ability to use gift funds. Gift funds are money provided by a qualified donor, such as a family member, to assist with purchasing a home.

Gift funds can help you meet the FHA’s minimum down payment requirement (typically 3.5% of the home’s purchase price) or cover closing costs and prepaids like title fees or homeowners insurance, as long as they meet the FHA’s guidelines.

FHA Gift Funds vs. Gifts of Equity

Though often used interchangeably, it's important to note the difference between gift funds and a gift of equity. A gift of equity is a credit provided by the seller from the seller proceeds that acts as a credit towards the buyer’s expenses at closing while gift funds are a direct monetary contribution.

Both options can save you money, but they work in distinct ways.

2024 FHA Gift Funds Update

FHA gift fund regulations largely remain consistent with previous years, but in 2024, they relaxed their requirements around donor bank statements.

While a donor's bank statement showing the transfer of gift funds is still acceptable, it's no longer required, and instead FHA opened up more documentation options such as copies of the front and back of the canceled check paired with evidence of deposit into the borrower's account, or a line item transaction showing the funds being transferred from the donor's account to the borrower's account.

These updates are intended to ease the process for donors and borrowers alike.

What must be included in the letter?

The FHA gift letter must contain the following details:

• Donor Information: The full name, address, telephone number and relationship to the borrower will be required.

• Gift Amount: You’ll need to include the exact dollar amount being gifted.

• Statement of No Repayment: Provide a clear statement confirming that the funds are a gift and that there is no expectation of repayment.

• Donor’s Signature: To verify authenticity, the donor must sign and date the letter.

The FHA gift letter ensures transparency and helps the lender verify that the funds meet the necessary guidelines. Without this letter, the funds won’t be considered eligible!

Who can give FHA gift funds?

Unfortunately, not just anyone can provide FHA gift funds. Here are the types of donors that the FHA allows:

• Family members

• An employer or labor union

• A charity

• A government agency or organization providing assistance to first-time homebuyers or low and medium-income borrowers

• A friend with a clearly defined and documented relationship

When it comes to friendships, the donor must have a close, verifiable relationship with the borrower to comply with FHA guidelines.

However, certain parties are prohibited from providing gift funds due to potential conflicts of interest. Ineligible sources include property sellers, real estate agents or brokers, loan officers, and any other parties involved in the transaction.

This is to prevent any undue influence or unethical practices that could complicate the loan approval process. Ensuring that your gift funds come from an eligible source is essential to avoid delays or issues with the FHA loan approval.

FHA Gift Fund Process

Using gift funds for your FHA loan involves several steps, and proper documentation is essential to meet FHA requirements. Here’s an overview of the process:

1. Obtain the FHA Gift Letter

Using gift funds for your FHA loan can be a straightforward and rewarding process when you know the steps. Proper documentation is key to meeting FHA requirements.

The first step is to secure a signed FHA gift letter from the donor. This letter should clearly outline the donor’s intent and include important details like their contact information, the gift amount, and a declaration that the funds are a gift with no expectation of repayment.

2. Document the Gift

Next, you’ll need to document the gift thoroughly. This means providing evidence of the gift deposit. You’ll also need proof of the transfer itself, whether that’s a copy of a canceled check, a wire confirmation, or another document showing the funds moved from the donor’s account to yours. Your own bank statements might also come into play to confirm you’ve received the funds.

While it might seem like a lot, each piece of documentation helps create a clear and transparent trail, which will make things easier for everyone involved.

3. Verification by the Lender

Once everything is documented, the lender steps in to verify that the gift funds comply with FHA guidelines.

This includes confirming the donor’s eligibility, the source of the funds, and making sure all documentation checks out. Think of the lender as your partner in this process, ensuring everything is in order so your loan can move forward without a hitch.

Similarly, avoid any unexplained deposits or last-minute fund transfers, as these can raise concerns with the lender.

Bottom Line

FHA gift funds can be a powerful tool for homebuyers who need help covering their down payment and closing costs. By allowing financial assistance from family members, employers, and other approved sources, the FHA program makes homeownership more accessible, especially for first-time buyers.

Still have questions? Reach out to a Neighbors Bank loan expert today.