Buying a home requires a significant financial investment. Sometimes, borrowers will use money that has been gifted to them for their down payment. This money is referred to as a “gift fund.” Gift money can be used for any type of mortgage, including FHA loans, so long as it meets the appropriate requirements. Below, we’ve provided some information about FHA loan guidelines for gift money.
What Is Gift Money?
We’ve touched on this a bit already, but let’s talk about it a little further. Gift money is money that has been given to a borrower for the purpose of buying a home. Usually, borrowers use the money to cover their down payment or closing costs.
One of the most important rules about gift money is that it must be considered a “gift” and not a loan. It must be clear that the borrower is receiving the money free of obligation and does not need to repay the provider.
FHA Loan Guidelines for Gift Money
If you plan on receiving gift money to use for a downpayment on an FHA loan, it’s important that you know what’s expected of you. The FHA has very specific requirements when it comes to gift money. Here are some important guidelines that you should be aware of:
- Restrictions for who can donate: Gift fund money has to come from an approved source. Not just anyone can donate. Acceptable donors include a borrower’s relative, an employer or labor union, a close friend with a clearly defined and documented interest in the borrower, a charitable organization, a governmental agency or public entity that has a program providing home ownership assistance to low- and moderate-income families, or first-time homebuyers.
- Donors cannot have an interest in the sale of the property: The donor cannot be the seller of the property, the real estate agent, the builder, or an associated entity.
- The source must be verified by the lender: Your lender will be responsible for verifying the source of your gift money. You may be required to provide certain documentation so that they are able to do this.
- Gift fund letter: Your lender is required to document your gift funds with a Gift Letter. This letter must include important information about the donor, the amount of the gift, a statement about how no repayment is required, and what relationship you have to the donor.
- Additional requirements: You may be obligated to fulfill additional requirements, as stated by the HUD.
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