In a recent post we examined the FHA loan policy about down payments for new purchase home loans. FHA loan rules require all new purchase loans for single family residences to include a minimum cash investment from the borrower of 3.5%.
That 3.5% must come from an approved source including the borrower’s own cash reserves, cashed-in investments, savings bonds or other holdings. The required down payment cannot come from what the FHA labels “non-collateralized loans” such as a payday loan, credit card cash advance, etc.
The down payment money is permitted to come from a third party as a bona fide gift, as long as the source of that gift is acceptable under FHA loan rules. What are considered acceptable sources of gift funds for down payments?
Before we can answer that question, the FHA definition of “gift” must be discussed. A “gift” must meet specific parameters. 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.”
That is a very important aspect of using gift funds as a down payment source–borrowers should know that rule going into the loan, as well as the second half of the rule which states that any portion of the gift funds not used to make a down payment can be counted by the lender as “cash reserves”.
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 also has specific rules that deal with prohibited sources of gift funds. Chapter Five says:
“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.”
Chapter Five adds, “Gifts from these sources are considered inducements to purchase, and must be subtracted from the sales price.”
It’s the lender’s job, regardless of where the down payment funds come from, to verify that the money has not come from a prohibited source–expect the lender to ask and to check when it’s time to make the down payment.
Do you have questions about FHA home loans? Ask us in the comments section.