FHA Requirements for Gift Funds

Present over flowing with gift moneyAs a borrower, can you use gift funds toward an FHA loan down payment or closing costs? Getting mortgage gift money from family or others is allowed by FHA with proper documentation. This guide will outline the rules and process for receiving and documenting gift funds for an FHAbacked mortgage.

Understanding FHA gift funds guidelines enables you to legally leverage this money to cover more of your required down payment. We’ll explain approved sources, documentation needed, and how lenders verify and track mortgage gift money on an FHA loan.

What Are FHA Gift Funds?

FHA gift funds refer to money given by a third party to pay for the borrower's down payment, closing costs, or other expenses to purchase or refinance a home through an FHA loan. 

Gift funds can come from:

  • Relatives  Parents, grandparents, siblings, aunts/uncles, cousins
  • Friends
  • Charitable organizations and government agencies
  • Employers

Following key regulations, FHA allows these thirdparty funds to supplement the borrower's cash. This reduces the amount you need to save on your own for closing.

Benefits of Using FHA Gift Funds 

The main advantages of FHA gift funds include:

  • Covering more of the required down payment, ideally avoiding private mortgage insurance
  • Paying for closing costs so less cash is needed up front
  • Allowing you to buy sooner by supplementing your savings
  • Improving debttoincome ratios by reducing monthly mortgage costs

When properly documented, gifts can make qualifying easier and reduce the cash you need to close.

FHA Requirements for Gift Fund Documentation

To use gift funds for an FHA loan, you and the donor must provide:

  •  Gift Letter - Signed letter including donor's name, address, amount, and a statement that no repayment is required.
  •  Proof of Funds Transfer - Documentation showing the gift money trail from the donor's account into your account, such as bank statements, wire receipts, etc. 
  •  Proof of Relationship - If needed, paperwork like a birth certificate proving your relationship to the donor.

By collecting these required documents, you validate it is a genuine gift that supplements your cash.

Steps for Receiving FHA Gift Funds

Follow this process to document FHA gift funds properly:

  1. Have the donor provide a gift letter and proof of their funds/transfer ability.
  2. The donor directly transfers the gift to your account via wire, cashier's check, etc. Ensure the statement shows their name.
  3. Gather bank statements or receipts showing the money's movement from the donor's account to yours. 
  4. Submit all documentation to your loan officer to certify the gift money source.
  5. The lender will review to confirm funds are adequately tracked and documented.

Proper paperwork converts the money into acceptable source funds per FHA regulations.

Can the Seller Provide Gift Funds on an FHA Loan?

FHA will only allow mortgage gift funds from the property seller if they are a family member. Gifts from nonrelative sellers are strictly prohibited and can potentially disqualify your loan application.

If the seller is a relative providing gift money, make sure to disclose it right away and follow all other FHA gift documentation requirements. But gifts from a nonrelative seller are too risky for FHA to permit.

Are Mortgage Gift Funds Taxable by the IRS?

The IRS allows individuals to give up to $18,000 in 2024 without triggering federal gift taxes. For FHA mortgage gifts, both parties must pay taxes in these scenarios:

  •  The gift exceeds $18,000, and the donor has exhausted their lifetime exemption amount
  •  It is not a bona fide gift and requires repayment like an informal loan

So, contributions under $18,000, avoiding gift tax rules, can be used, assuming proper FHA documentation.

HUD's Definition of an Allowable FHA Gift Donor 

HUD guidelines specify that an allowable gift donor for FHA loans:

  •  Must have no expected or implied interest in the property sale or loan transaction.
  •  Cannot currently be, or have plans to become, a property resident.
  •  Must be giving a gratuitous gift not tied to any obligation or repayment.
  •  Can be a blood relative, church, nonprofit, or government agency providing down payment assistance.

Gifts must be given freely with no strings attached and documented as such. This qualifies them as eligible sources of borrower funds per HUD.

Key Takeaways on Using FHA Gift Funds

  •  Get mortgage gifts deposited directly into your account and document the trail
  •  Collect a gift letter signed by both parties and proof of funds transfer
  •  Only family member sellers can provide gift funds  no nonrelatives
  •  Gift amounts under $18,000 avoid IRS rules and can be used
  •  HUD specifies donors cannot have any retained interest in the property or transaction

With proper adherence to guidelines, an FHA gift can improve your ability to qualify for and afford the home loan amount you need. Consult a loan officer and real estate pro to ensure smooth sailing throughout the mortgage process.

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