FHA loan rules in HUD 4000.1 have specific guidelines where gift funds to the borrower are concerned. Gift funds are commonly used for home loan expenses including down payments, but when the borrower accepts gift funds for the purpose of making that down payment, the funds must meet FHA acceptability standards.
What does this mean?
FHA loan rules are very precise when it comes to the source of money used for a down payment. A borrower cannot use proceeds from a non-collateralized loan such as a payday loan or credit card cash advance to make a down payment, and if gift funds are used the money must come to the borrower with no obligations.
HUD 4000.1 has the guidelines for these gifts, which includes the following definition:
“Gifts refer to the contributions of cash or equity with no expectation of repayment.” Note that equity can be provided instead of money. Who can provide cash or equity to the borrower? Specifically, HUD 4000.1 states:
“Gifts may be provided by:
-the Borrowers Family Member;
-the Borrowers 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 homeownership assistance to low or moderate income families; or first-time homebuyers.”
Documentation of funds used for the down payment is an important task for the loan officer. HUD 4000.1 says:
“If the gift funds have been verified in the Borrowers account, obtain the donors bank statement showing the withdrawal and evidence of the deposit into the Borrowers account. If the gift funds are not verified in the Borrowers account, obtain the certified check or money order or cashiers check or wire transfer or other official check, and a bank statement showing the withdrawal from the donors account.”
As you can see, it’s best to be prepared to show the “paper trail” or supporting documentation for the source of any financial gift associated with your home loan transaction.
FHA loan rules in this section of HUD 4000.1 also offer a caveat for situations where the lender may offer some form of “gift funds” as part of the transaction:
“The Mortgagee and its Affiliates are prohibited from providing the loan of gift funds to the donor unless the terms of the loan are equivalent to those available to the general public.
Regardless of when gift funds are made available to a Borrower, the Mortgagee must be able to make a reasonable determination that the gift funds were not provided by an unacceptable source.”