A How To Guide For Using Gift Sourced Funds In FHA Loans

by Heindrick So
December 1st, 2008

One of the most beneficial features of an FHA loan is the allowance of gift sourced funds-often used towards a borrower’s down payment. Compared to conventional loans, FHA loans are still quite a bargain as down payment requirements are only 3% (soon to be 3.5%). For conventional loans, many lenders will require anywhere from 5% to 10% down in order to qualify. And although FHA recently disposed of down payment assistance programs, borrowers can still utlize these gift funds towards their down payments. 

Gift funds are great for parents looking to help their children, relatives helping out family members, or even close friends helping out each other. In addition to down payments, gift funds can also be used for a variety of sources during the FHA mortgage transaction. While gift funds remain great affordable housing alternatives, there are a few warnings and reminders FHA borrowers should first be aware of. Through these allowed gift funds, FHA borrowers will have yet another advantage to close their loan during this tough mortgage lending period. 

What Are FHA Gift Funds?
Gift funds are defined as a gift of cash given to the borrower voluntarily and without compensation. No conditions may be attached to this gift, nor can repayment be expected or implied. The source of these gift funds are just important as they cannot be sourced from any parties interested in the sale of the property; this includes the seller, real estate agents, mortgage broker, home builder, and any other associated entities. In essence, the FHA expects these funds to be an outright gift from someone who would be logically concerned for the housing of the borrower. 

FHA Mortgage Lenders Want Proof and Documentation of These “Gifts” 

– Lenders will require a gift letter to be signed by the borrower and donor-the gift letter includes the donor information, their relationship to the borrower, a statement outlining that no repayment is required, and must be signed by the donor and borrower recipient. 

– Lenders will verify the source of these funds from the donor to ensure that the funds were in fact sourced by the eligible donor. For example, FHA lenders will investigate the source of these funds to make sure the seller or realtor didn’t just give money to Mom and Dad to pass on to the borrower. A typical evidence of proof would be bank statements from the donor showing the funds have been available longer than just recently. 

– The relationship between donor and recipient is also more closely watched nowadays. Also, lenders might require more “proof” if the donor isn’t the parents, grandparents, or close relative. Proving a “close relationship” is a bit in the gray area, but the more proof that you can come up with, the better. I’ve heard of an example where a Godfather was the donor, and the borrower had sent in a dated picture of them together to prove an existing relationship. Fortunately, the lender viewed this as adequate evidence and approved the gift funds. 

– Title companies and escrow agents will also be on the lookout at the final closing table to ensure nothing fraudulent occurs after the lender’s verifications. They will check to make sure the transfer originated from the documented source of funds, and also prohibit any interested parties reimbursing the donor after closing. 

Gift source funds are an important tool of affordable housing, but FHA has taken steps to fight against individuals looking to take advantage and commit fraud. In most cases, if the gift is a true gift, borrowers should not find any problems using these funds towards an FHA loan. It’s also worth mentioning that the gift funds can also be used towards a borrower’s closing costs, assets and reserves, and payoffs toward existing debt. In either case, documenting and sourcing the funds will be the critical step to ensuring proper compliance with FHA lenders.

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This entry was posted on Monday, December 1st, 2008 at 12:08 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

6 Responses to “A How To Guide For Using Gift Sourced Funds In FHA Loans”

  1. Maricela Says:

    Excellent, thanks!

  2. rendwick Says:

    If a person owns a house and a close relative wants to buy the house can the gift funds come from equity in the house?

  3. almeida jones Says:

    the lender we are working with wants the DONOR to source where he got the money from.

    QUESTION: if he got it from a family member and the family member provided a bankstament showing it came from their account…

    is this acceptable?

  4. Connie Says:

    can my first cousin be teh donor?

  5. Sharon Says:

    This all sounds wonderful until you realize the intent the government has in investigating the “donor” sources of these “gift” funds. We gave a sister a check to help with closing costs on an FHA loan. We signed off on the Gift Letter stating none of this money was coming from the realtor, seller, etc. The Gift Letter even stated the criminal consequences of $5000 in penalties and jail time if this was a fraudulent act. We only gave her $1500!
    Nothing on the gift letter said the bank or government was going to investigate where the money came from through our bank statements. The bank our sister was dealing with said they would need a bank statement to prove availability of the funds. Our sister cashed the check, had the funds in her bank, and we could provide the front and back of the cashed check. The bank said they needed a copy of our recent bank statement. I provided that with names and sources of our employer’s direct deposit blanked out – as that has nothing to do with this transaction and is nobody’s business what we make! The bank said this was unacceptable as they were looking for any “unidentified” deposits. They were accusing us of fraud before a crime was committed! We were needing to prove ourselves innocent of a crime that hadn’t even taken place.
    I refused to provide anymore information as the original request for documentation from the banker simply stated that they needed a copy of the bank statement “upon which the check was drawn,” “to prove availability of the funds.” What I provided did that. The banker said this statement with blanked-out information was rejected by the underwriters – and could I please provide a non-blanked-out copy of the statement because this is just a “little exercise” they have to go through. I told the banker that this was not a “little exercise” to us – that it is our private information and is nobody’s business. If he was not forthright or clear in stating the bank’s or government’s intentions about how far they were going to go in investigating (accusing) the donor – who is just trying to be helpful to a sister and is not applying for this loan – then he would need to explain that to the underwriters himself as to why he was having a hard time getting the documentation he needed. I told him that if he suspected fraud, he should first go to the party which he suspected of providing the funds, and then come knocking on our door – because we’d already signed off on an extremely scary document stating we could be in for a $5000 penalty and jail time if we were committing fraud. Would we do that in order to be part of a scheme to give someone $1500? I don’t think so. Amazingly, after that exchange, he found a different way to document the monetary gift. Do-Gooders, beware! (If only the government were so concerned in tracing political campaign monies….)

  6. Kathy Says:

    The “banker” is the one you should be disappointed with – not the process or the government. Mortgage fraud is rampant and underwriters are having to question more and more issues in loan files these days because borrowers, seller, builders, loan officers, etc. are not always telling the truth or providing all the details they should be providing up front. Underwriters have to be part detective these days to make sure that the loans they are approving are legitimate. But what you were eventually asked to provide – an unmarked bank statement to prove funds you were gifting to your sister – is the correct documentation needed for this situation. Even though your intentions, when marking out your source of direct deposits, appear honorable, you have to understand that the underwriter reviewing your loan doesn’t know you from Adam and can’t just assume that you’re just protecting your personal information. It is so unfortunate that there are people out there that have ruined this process for the rest of us, but that is just the fact of this business these days. FHA has established certain guidelines that are to be followed to ensure that loans are based on honest and accurate information. Don’t blame underwriters or government for requiring information that you should have been informed about upfront.

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