FHA Down Payment and Gift Rules Still Apply (2024)

FAQs

FHA Down Payment and Gift Rules Still Apply? ›

FHA loans allow 100% of the down payment to come from gift funds. Acceptable donors include family members, employers, and certain organizations. Gift funds must be properly documented to be accepted. The donor must provide a gift letter stating the funds are a gift, not a loan.

Gift funds are monies given to a borrower to help with a home purchase. For FHA loan approval, borrowers can use the gift funds for a down payment, closing costs, or reserves needed for approval.

Closing escrow verification: If the gift funds are verified at the close of escrow, all that's needed is proof of the electronic funds transfer, a bank-certified check, a cashier's check, or an official bank check. You don't need a bank statement.

FHA allows gifts of equity as long as the home is being sold from one family member to another. VA and USDA loans don't require a down payment, so equity gifts are rare. The USDA says, “The gift of equity must be expressed as a reduction to the sales price,” meaning you cannot receive cash-back closing.

Most conventional mortgage loans allow homebuyers to use gift money for their down payment and closing costs as long as it's a gift from an acceptable source, such as from family members. Fannie Mae and Freddie Mac define family as the following: Parent. Children (including adopted, step and foster children)

You'll typically need to sign a gift letter that states your name, contact information, the gift amount and relationship to the borrower. You can gift funds for a down payment and avoid a gift tax if you stick within the IRS exclusion amount, which is $18,000 per year for 2024.

According to HUD 4000.1: “The maximum LTV percentage for Identity-of-Interest transactions on Principal Residences is restricted to 85 percent. The maximum LTV percentage for a transaction where a tenant-landlord relationship exists at the time of contract execution is restricted to 85 percent.”

Prove The Source Of Your Down Payment

A gift letter is a statement that ensures your lender the money that came into your account is a gift and not a loan. The person who gave you the money must write and sign the gift letter as well as provide their personal information.

From a legal standpoint, a court will look for certain evidence to verify the intention of a loan. This will include a formal agreement signed by all parties detailing the amount provided, a schedule of repayments, and a specified term for repayment.

Fortunately, a broad range of people and entities can provide FHA gift funds. Here's a list of acceptable FHA gift donors: Family members – including cousins, nieces and nephews – with a dedicated interest in your life. A charitable organization providing financial aid.

Can a gift of equity be used as a down payment? ›

Sellers can provide a gift to buyers without having to dig into their own savings to give them cash. Buyers don't have to pay taxes on a gift of equity. Most lenders allow buyers to use a gift of equity as their down payment, saving them the hassle of scraping together enough money for this payment.

Yes, a cousin can gift funds for an FHA loan as they are considered a family member under FHA guidelines.

Recently opened accounts or individual large deposits in excess of 50% of borrower' s total monthly effective income will require an explanation and documentation for source of funds. Deposits must be verified to be commensurate with the borrower's income and savings history.

This is something to keep in mind when timing your gift and mortgage application. “We only ask for the previous two months of bank statements,” says Flynt. “So if the gift was deposited into the bank account before the last two months' statements — which is generally 60 days — that money is considered 'seasoned.

Can my parents give me $100,000? Your parents can each give you up to $17,000 each in 2023 and it isn't taxed. However, any amount that exceeds that will need to be reported to the IRS by your parents and will count against their lifetime limit of $12.9 million.

Is Down Payment Gift Money Taxed? Down payment gift money isn't taxed by default. However, the IRS requires any financial gifts to be reported if they exceed an annual cap. For gifts given in 2023, the IRS charges gift tax when they exceed $17,000 to one person.

Sellers can provide a gift to buyers without having to dig into their own savings to give them cash. Buyers don't have to pay taxes on a gift of equity. Most lenders allow buyers to use a gift of equity as their down payment, saving them the hassle of scraping together enough money for this payment.

Down payment assistance is available, particularly for first-time home buyers. Home buyers can explore a variety of FHA down payment assistance options, particularly at the state and local level. These assistance programs typically come in the form of loans, grants and matched savings programs.

Restrictions on family members

The FHA has specific rules about who can give gift funds for an FHA loan. Family members are allowed to be donors, but there are some restrictions. The approved list of family members includes parents, grandparents, siblings, and aunts or uncles.

Yes, a borrower can use gift funds to pay off debts. Per the guidelines gift funds can be used for all or part of the down payment (see question 4) , closing costs, or financial reserve requirements, the guidelines do not impose any limit to the use in a transaction.