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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 2rHouse.org
and personally answers questions from readers about FHA mortgages and
mortgage
advice in general.
MORE RESOURCES updated Thu. June / 08 / 2023
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