FHA loans make up roughly 25% of all home loans. They are non-conforming loans with lenient requirements and affordable down payment. But what if you don’t have the funds?
That’s where FHA gift funds come in. Your well-wishers can gift you funds to cover the expenses of an FHA loan, making it easier to finance your home purchase. After all, 52% of first-time home buyers received financial help from friends and family.
FHA gift funds can help you fulfil the American dream of home ownership. So, why wait? Take the next step in your home buying journey and get pre-approved now!
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What Are FHA Gift Funds?
FHA gift funds are gifts of cash or equity with no obligation of repayment. You can use these funds towards an FHA loan if you do not have adequate resources.
Gifts can help you cover up to 100% of the down payment, closing costs, and housing reserves.
FHA gift funds are only available for loans backed by the Federal Housing Administration. Make sure you follow all the guidelines to qualify for an FHA loan.
How Do FHA Gift Funds Work?
Only specific people are eligible to gift funds. The gift donor must provide a gift letter that mentions the reason for the gift, and their relationship with you.
The gift letter should also state there is no expectation of repayment. This ensures that the funds are a gift and not a loan in disguise. The gift letter is necessary to get an FHA loan.
You will also need bank statements of yourself and your donor to prove the exchange of assets.
The transaction is fairly straightforward in case of cash gifts. When it is a gift of equity, the donor sells you their house at a price lower than its actual worth. You can use this equity towards the down payment or other costs.
Who Can Donate FHA Gift Funds?
As per the United States Department of Housing and Urban Development (HUD), here is the list of acceptable FHA gift donors:
- Family members
- Close friends (with a documented interest in the borrower)
- Employer or labor union
- Government agencies or public entities
- Charities
Who Cannot Donate FHA Gift Funds?
Those associated in the property transaction cannot gift funds. This includes:
- The seller
- The real estate agents or brokers
- The home builder
- The lender
What Documentation Is Needed?
In order to use FHA gift funds, you will need to provide the following documents:
- Bank statement: The gift donor’s bank statement is required to verify their financial capacity to gift.
- Deposit slip: The deposit slip shows that that the amount has been transferred to the borrower’s account.
- Gift letter: This confirms that the amount is a gift and not a loan. It states that no repayment is required, and outlines the relationship between the donor and borrower.
- Additional documents: You may also need to provide other documents as per FHA guidelines, such as pay stubs and tax returns.
Common Issues
FHA gift funds can empower you to make a quick down payment, or purchase a more expensive house. However, you may also face some issues:
- Verification: A large gift fund deposit can raise suspicion during the underwriting process. The gift fund should be traceable through bank accounts to avoid this possibility.
- Loan in disguise: If the gift fund is actually a loan which is being presented as a gift, it could hamper your loan approval process.
- Incorrect documents: The documents provided must be valid, or the gift may not be allowed.
- Timing of transfer: Transfer the gift fund to your account with enough time in hand. Delayed transfers could create unwanted logistical issues.
Bottom Line
FHA gift funds are helpful for homebuyers who wish to take out an FHA loan. They significantly reduce the upfront costs of homeownership.
Remember, the funds must be genuine gifts, not loans in disguise. In case someone wishes to support you in your goal of purchasing a new home, they must follow all the FHA gift guidelines.
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Frequently Asked Questions
Does FHA allow 100% gift funds?
Yes. Home buyers can receive 100% of their down payment or closing costs as gifts, provided they come from an eligible gift donor.
What is a gift letter?
A gift letter states that the gift amount does not need to be paid back. It also includes the relationship of the donor to the recipient, the date of the gift, and other details.
Are FHA gift funds taxable?
Any amount below $17,000 doesn't attract gift tax. However, FHA gift funds above that amount will be taxable and have to be reported to the IRS.
