A How To Guide For Using Gift Sourced Funds In FHA Loans
December 1st, 2008
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- FHA Loans: Qualifying for Lower Mortgage Rates
- Your FHA loan: Finding funds for down payment and closing costs
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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