FHA Gift Funds Guidelines: Who Can Give and How to Document It

You may use gift funds to pay your whole down payment on an FHA loan, along with closing costs and prepaid items. The down payment is 3.5% if your credit score is 580 or above and 10% if your credit score is between 500 and 579, figured on the lower of the sales price or the appraised value. There is no dollar cap on a gift. If the gift is more than the funds you need to close, the excess may be returned to you after settlement.

On a $350,000 house, the down payment is $12,250. A gift of $15,000 covers that amount, and the rest may be applied to closing costs and prepaid items.

HUD Handbook 4000.1, the rule book of the Federal Housing Administration, allows five kinds of donors.

Is a cousin or fiancé a family member for an FHA gift?

No. A family member is one of the following: your parent, grandparent or child, including step and foster relatives; your spouse or domestic partner; a legally adopted child or a foster child; your brother, sister, stepbrother or stepsister; your uncle or aunt; and your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law. Your cousin, niece, nephew or fiancé is not a family member and may give only as a close friend. A close friend must have "a clearly defined and documented interest in the Borrower." Your lender decides what documentation is enough.

Who can't give FHA gift funds?

The following parties cannot provide any part of your down payment: the seller; a real estate agent; the builder or developer; your lender; and any person who is reimbursed, directly or indirectly, by one of them. The rule comes from Section 203(b)(9)(C) of the National Housing Act.

A parent who does not wish to give cash may be added to the loan as a non-occupant co-borrower.

Your lender must obtain a gift letter that is signed and dated by both you and the donor. The letter must state the following:

• the donor's name, address and telephone number
• the donor's relationship to you
• the dollar amount of the gift
• a statement that no repayment is required

HUD does not require the property address or the donor's account number, and a lender's own form may ask for them. The dollar amount in the letter must match the amount that is transferred.

The gift letter states that the money is a gift. The transfer records show where the money came from. Your lender must have both before the loan closes. The process has four steps:

1. Confirm that the donor is on HUD's list and agree on the amount
2. Sign and date the gift letter with the donor
3. Choose whether the money goes to your account before closing or to the closing agent
4. Give your lender the proof that matches that choice and keep your transfer records until the loan funds

Gift deposited before closing and donor bank statements

If the gift is verified before settlement, your lender must obtain one of the following, along with evidence of the deposit to your account:

• the donor's bank statement showing the withdrawal
• a copy of the donor's canceled check
• a copy of the donor's withdrawal receipt
• evidence of the electronic transfer of funds from the donor's account to your account

Any one of the four items is enough. A donor who does not wish to provide a bank statement may provide a canceled check or a withdrawal receipt.

Gift sent to the closing agent

If the gift is verified at settlement, your lender must obtain one of the following as evidence of payment to the settlement agent:

• evidence of an electronic transfer from the donor's account, such as a wire confirmation
• a bank certified check
• a cashier's check
• another official bank check

A gift line on the Closing Disclosure is not, by itself, evidence of the transfer. Cash on hand "is not an acceptable source of donor gift funds." In all cases your lender must be able to reasonably determine that the gift did not come from a source that is not allowed.

A gift that is already in your account must meet the same rules. Before the loan is underwritten, the following must be true:

• the amount on the gift letter matches the amount of the deposit
• the gift did not arrive as cash on hand
• the gift letter is signed and dated by both you and the donor
• the money did not pass through the seller, an agent, the builder or the lender

If your loan received an Accept from the TOTAL Scorecard, gift funds left over after closing, whether received as cash or as equity, may be counted as part of your reserves. If your loan is manually underwritten, surplus gift funds may not be counted as reserves. On a manually underwritten loan, required reserves must come from funds other than the gift.

A gift of equity may be given only by a family member, and only on a property that is being sold to another family member. The difference between the value of the home and the sales price is credited toward your down payment. A gift of equity must meet the same gift letter requirements as a gift of cash. On a home with a sales price of $300,000, a gift of equity of $30,000 covers the minimum down payment of $10,500, and the rest may be applied to your closing costs.