FHA home loans are popular among home buyers for various reasons. The 3.5% down payment option is one of the most powerful lures. Eligible borrowers who use this government-backed lending program can put down as little as 3.5% of the purchase price or appraised value, whichever is less.
The relatively low down payment is a commonly known feature. But there’s another benefit many home buyers don’t realize. The Department of Housing and Urban Development (HUD) allows for the entire down payment to be a gift from a family member or other approved donor. This means the home buyer could obtain an FHA loan with no initial investment whatsoever.
In contrast, most conventional home loans require borrowers to use at least a portion of their own money for the down payment. They allow gifts from family members in some cases, but only for a certain percentage of the down payment. (The exact percentage varies from one lender to the next.)
With FHA, the Entire Down Payment Can Be a Gift
FHA down payment gifts from family are a major benefit for cash-strapped borrowers. It is partly what makes these loans so appealing to borrowers with limited funds.
Malcolm Hollensteiner, director of retail lending for TD Bank, recently explained these pros and cons to the Washington Post, in an article published on April 10, 2015.
According to Mr. Hollensteiner:
“If all of your down payment funds are a gift, then an FHA loan is your best choice. Because for a conventional loan, you need to have your own money for at least some of the down payment.”
FHAhandbook.com, an educational website for home buyers and mortgage shoppers, echoed this sentiment:
“With an FHA-insured home loan, the entire down payment can be gifted from a family member … most conventional [non-FHA] loans do not allow 100% gifting for the down-payment funds. This is another key benefit of the FHA program, one that appeals to first-time buyers in particular.”
So it seems that home buyers who plan to rely heavily on gifted funds would do well to consider the Federal Housing Administration’s loan program.
Other Acceptable Sources, Aside from Family
FHA allows down payment gifts from family members. But the gifted money doesn’t have to come from a relative. There are other acceptable sources as well. To get the skinny on this, you have to dig into the handbook. The official HUD handbook, that is.
FHA down payment gift rules and requirements can be found in Chapter 5, Section B of HUD Handbook 4155.1. This handbook can be found online, and it’s worth reading for anyone who is considering an FHA-insured mortgage loan.
Chapter 5 of this handbook provides a list of approved sources for down-payment funds. According to that chapter, an “outright gift of the cash investment is acceptable if the donor is” one of the following:
- The borrower’s relative / family member
- The borrower’s employer or labor union
- A close friend who has a “clearly defined and documented interest” in the borrower
- An approved charity organization
- A public entity or government agency that offers assistance to (A) first-time home buyers or (B) families with low to moderate income
To learn more about FHA down payment gifts from family and other approved sources, refer to the official source mentioned above.
Gift Letters Are Required in All Cases
Think you can accept a down payment gift and be done with it? Not so fast. HUD also requires lenders to obtain gift letters from the donor, in all cases where third-party funds are being donated. But it doesn’t have to be anything fancy. It just has to state that the donor is truly gifting the money and does not expect to be repaid.
In other words, the gift letter must make it clear that the donor is not loaning money to the borrower, but giving it to them freely.
At a minimum, the gift letter must include (A) the name, address and phone number of the donor; (B) the dollar amount being donated; and (C) a statement that no repayment is required.
Note: Dozens of sample gift letters can be found online, with a quick Google search.
Some Lenders Require Bank Statements for Verification
In addition to the gift letter mentioned above, mortgage lenders usually request bank statements from the family member or donor who is providing the FHA down payment gift.
This requirement is also spelled out in the aforementioned HUD handbook. It states that the “lender must document the transfer of gift funds from the donor to the borrower.” This documentation is typically done with bank statements from the donor, though a cancelled check may suffice in some cases.
The bottom line here is that borrowers who use the FHA loan program do not have to cover the down payment expense out of their own pockets. The Department of Housing and Urban Development allows for 100% of the down payment to be a gift, as long as three conditions are met.
- The gift must come from a family member or other approved source.
- The donor must provide a gift letter that states no repayment is expected.
- The transfer of gift funds from donor to borrower must be documented in some way.
Learn more: Borrowers interested in the FHA loan program can learn more about this topic from HUD Handbook 4155.1, which is available at HUD.gov.