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FHA Mortgage: When Your down payment is a Gift

There has been so much fraud discovered in the FHA program allowing gift funds for down payment that Lenders and borrowers are required to absolutely document every step of the gift transaction to prove it was legitimate.

Here's how it works: FHA allows the required down payment to be a gift from someone who would logically be concerned about housing for the borrower. This means parents, siblings, other close family members. It can also mean employers in some circumstances, or even very close friends or roommates if the relationship can be verified.

Does "relationship be verified" sound like an invasion of privacy? It is often viewed that way, but the spirit of the HUD regulation is that unallowable donors be prevented at all costs from participating in the gift. Let's explore what HUD/FHA is actually trying to accomplish so we can make better decisions about how to document the gift funds.

It has been proven statistically that homeowners with zero funds in the transaction are more likely to default on the loan and suffer foreclosure. An FHA transaction is already set up to require very little down; often the 3-5% required is less than a security deposit on a rental unit.

If a Realtor or Builder or Property Seller were to give the Homebuyer the gift for the down payment in order to make the deal go through, then all parties involved would benefit in some way from the transaction (commission, sale, new home), but the new Homeowner would come away with very little regard for the responsibility of ownership.

Buying and maintaining a home costs something. There is nothing essentially wrong with getting into a home for zero$ down, but you must be financially prepared to continue living there. If people who will profit from the deal are allowed to use some of their profit to leverage unqualified owners into homes, defaults and foreclosures will increase and the Housing Insurance fund will suffer.

OK, that's the reasoning behind the rules and regs. But HUD / FHA are there to promote Affordable Housing, so there must be allowances for legitimate circumstances. That is where the gift from family comes in. It is assumed that when a family member gives a gift of down payment funds, they are aware of the financial circumstances of the buyer and are also willing and able to help out if need be.

There is even a provision for family members LENDING the buyer the down payment, as long as the repayment terms are formally stated in writing and the payment terms are included in the buyers debt ratio for qualifying purposes.

Now it's time for documenting the transaction. The Lender is going to require (based on HUD / FHA regulations) that every step of the transaction be verified as happening exactly as represented. The loan file must have:

  • A gift letter written and signed. It must say exactly what FHA rules call for, so wait until the Lender provides you with the right form.
  • Proof that the donor has the $$ money to give and that it truly belongs to them. This can be a Verif from the Bank or a copy of a bank statement showing the funds in the account longer than just recently. (This is where you begin to prove that the Realtor, Builder, or Seller did NOT give the money to Mom and Dad to give to you).
  • Trail the $$ funds as they move from Donor's account to your account or to the Title Company to hold in escrow. This is no time to play games. The check should be from the same account as above. If it is a certified or cashiers check, it will have the name of the Remitter on it. The actual transfer of the $$ is the most critical element of proof.
  • Title Companies and Escrow Agents are required by Federal Law to verify that nothing sneaky happens at the closing table to undo any of the above items. The Realtor, Builder, or Seller can NOT pay Mom and Dad back at closing. Neither can you. No side deals.
It is up to you to make sure you don't commit Mortgage Fraud. There are abundant programs available now to assist Homebuyers with down payment funds. When fraud gets out of control, those programs routinely get cut as a means to fix the problem. This hurts everyone, including you.

If you need assistance and you do not have a family member who can gift funds to you, look into City programs you might qualify for. Many communities have Development agencies who work closely with HUD to create programs for helping buyers get homes. Another source of down payment funds could be a Non-Profit Agency approved by HUD / FHA to "gift" funds. Ask your lender or Realtor when you are Prequalifying for a loan.

Judi Moore authors Ask The Underwriter at and personally answers questions from readers about FHA mortgages and mortgage advice in general.


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