FHA Down Payment and Gift Rules Still Apply

July 29, 2022

FHA loan policy about down payments for new purchase home loans is quite clear. One condition of FHA loan approval is that the borrower provide a minimum cash investment--a down payment--of at least 3.5%.

That money is required to be verified by the lender as having come from an approved source. What is an approved source? The borrower can tap into his or her own cash reserves, cash-in investments, savings bonds or other holdings. The idea behind verifying the source of your down payment on an FHA mortgage is to prevent borrowers from provided money obtained from non-collateralized loans such as a credit card cash advance, payday loans, etc.

Down payment funds may also come from someone else in the form of a gift, so long as that gift and the giver meet certain FHA requirements. In order to establish whether a particular gift of down payment money is permitted, we have to examine what the FHA describes as a bona fide gift. According to HUD 4155.1 Chapter Five Section B, In order for funds to be considered a gift, there must be no expected or implied repayment of the funds to the donor by the borrower.

Then there's scrutiny of the gift giver. According to Chapter Five, An outright gift of the cash investment is acceptable if the donor is

• the borrower's relative
• the borrower's employer or labor union
• a close friend with a clearly defined and documented interest in the borrower
• a charitable organization
• a governmental agency or public entity that has a program providing home ownership assistance to low- and moderate-income families, or first-time homebuyers.

The FHA doesn't just list who may give such a gift--it also has rules discussing who MAY NOT provide gift funds for an FHA loan down payment. The gift donor may not be a person or entity with an interest in the sale of the property, such as

• the seller
• the real estate agent or broker
• the builder
• an associated entity

Gifts from these sources are considered inducements to purchase, and must be subtracted from the sales price.

FHA loan rules are specific and clear in these areas to insure fairness and to preserve the integrity of the home buying process with FHA loan funds. For more information on how these rules may apply to your situation, ask the loan officer or contact the FHA directly.

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