July 14, 2011
When a borrower applies for an FHA home loan, a down payment is required for all transactions.
Unlike VA home loans, FHA mortgages do not have a zero-money-down option. Some buyers may struggle to come up with a down payment on the FHA mortgage, which is why the rules allow borrowers to accept funds from outside sources to help pay for up-front expenses like down payments and closing costs as permitted by FHA regulations.
But the source of that income determines whether the money is considered a bona fide gift, or if it is considered an “inducement to purchase” which affects the amount of the FHA mortgage loan. Gift funds that come from anyone with “an interest in the sale of the property” can be considered inducements to purchase, and “must be subtracted from the sales price for mortgage calculation purposes” according to the FHA official site.
That’s part of the reason why sellers, builders, and real estate brokers do not offer cash assistance to the buyer. A seller may offer appliances and other perks along with the sale of the home up to a certain amount without affecting the amount of the loan, but even those perks have limits and can’t exceed a certain percentage.
The “gifts” may not be in cash, but the value of those gifts is treated as cash for mortgage calculation purposes.
Gift funds that come from an outside source with no financial stake in the outcome of the sale are treated much differently. According to the FHA rules, a gift donor can be a family member or anyone else with no interest in the sale.
These funds are considered pure gifts and can be used without penalty by the loan applicant for down payment or other expenses.
Likewise, there’s an exception for gift funds from people who do have a financial stake in the outcome of the sale. The exception applies when the seller of the property is a parent or when the real estate agent is a relative of the buyer. Again, pure gift funds do not affect the amount of the loan or the sales price.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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