4 min read Jan 11, 2024

FHA Gift Funds: Definition, Guidelines, and How They Work

Gift funds can help you get financing for an FHA loan if you want to buy a house and don’t have enough cash. However, you must adhere to all the guidelines when you receive gift funds for closing costs or down payments.

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🚀 FHA Gift Funds: An Overview

  • You can use gift funds towards the expenses for an FHA loan, such as down payments, closing costs, etc. You are not liable to pay the gifted funds back to the donor.
  • The donor can either provide a gift of cash or equity to the borrower. It is mandatory to specify the reason for the gift in the gift letter.
  • As per the guidelines of HUD, only the approved entities are eligible to provide gift funds.

What Are FHA Gift Funds?

The money that a borrower receives from a donor without an obligation of repayment is FHA gift funds. Borrowers can utilize these gift funds towards down payments, closing costs, or housing reserves.

An FHA loan is a non-conforming loan backed by the Federal Housing Administration (FHA). An FHA loan allows first-time buyers and people with moderate income levels to purchase a home.

FHA gift funds are only available for FHA loans. You should meet the following requirements to avail an FHA loan:

  • An FHA-approved professional must appraise the home.
  • The minimum credit score should be 580 with a 3.5% down payment.
  • The property should be your primary residence, and you must move in within 60 days of closing.
  • The home must meet the minimum property standards.
  • You must pay a mortgage insurance premium.

Apart from this, your DTI ratio, income, and loan amount play a vital role in your qualification.

How Do FHA Gift Funds Work?

The donor must write a letter stating that they want to gift the amount for your home purchase. This letter is necessary for the borrower to get a Federal Housing Administration loan. The letter must visibly state that there is no requirement for repayment.

It is mandatory for the donor to specify the reason for their gift. This ensures that the gift is legit and not a loan acting as a gift. Additionally, you need to store the bank statements of the donor and yourself. This acts as proof of the exchange of assets and helps track the flow of funds.

The donor can provide these gifts in the form of cash or equity. The transaction is much easier when it’s a cash FHA gift.

Also, when the donor gives the gift of equity, they sell their house to the borrower at a lower price than its actual worth. The borrower can use this equity toward the down payment or closing costs.

Approved Sources of FHA Gift Funds

As per 4155.1 5.B.4.b, the following entities are eligible to provide a gift:

  • 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 that provides loans to low-income families or first-time homebuyers.

Unapproved Sources of FHA Gift Funds

As per 4155.1 5.B.4.c, the following entities are not eligible to provide a gift:

  • The seller
  • The real estate agent or broker
  • The builder
  • An associated entity.

Bottom Line

The FHA gift funds help homebuyers with limited finances to purchase a home. These gifts can cover your down payments, closing costs, and cash reserves. The borrower must ensure that the gift letter comes from a valid source and releases them from the repayment obligation.

The donor can provide gift funds in the form of cash as well as equity. On the whole, this process should adhere to the FHA guidelines.

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Frequently Asked Questions

Does FHA allow 100% gift funds?

Yes, homebuyers can receive 100% of their down payments or closing costs as gifts. The gift funds should subject to the sources approved as per the 4155.1 5.B.4.b.

Can a girlfriend give a gift on an FHA loan?

No, gifts are allowed from family members, parents, grandparents, etc. However, your spouse or significant other can gift you funds if you are engaged to be married.

Do I have to prove that the money was a gift?

Yes, if the gift amount exceeds half of your monthly household income, the lender is likely to ask for the gift letter.

Do FHA lenders report gifts to the IRS?

There's no need to report the gift amount to the IRS if it doesn't exceed $17,000. Any amount below $17,000 doesn't attract gift tax. However, any amount above that will be taxable and has to be reported to the IRS.

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