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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:
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 2rHouse.org and personally answers questions from readers about FHA mortgages and mortgage advice in general.
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