Wednesday, December 5, 2012

What You Need to Know About FHA Down Payment and Gift Fund Guidelines

FHA home loans have been around since 1934 and have helped many buyers purchase the home of their dreams. The underwriting guidelines on FHA home loans are much more lenient than on the conventional loans making obtaining financing much more accessible for more people.

The minimum down payment required on a FHA home loan at this time is 3.5%. Compared to the conventional loan which requires a minimum of a 5% - 10% down payment, this can make the difference of being able to purchase a home for some buyers or not being able to purchase due the larger down payment requirement.

Sometimes, a buyer may not have all of the funds for the down payment and closing costs saved up, but they have a relative that wants to help them achieve the dream of owning a home. Both conventional and FHA loans allow a gift, however, there are big differences in the requirements on each type of loan.

On a conventional loan, if the total down payment is less than 20% than the occupying borrower must contribute 5% from their own funds before a gift can be received. For example, on a 0,000.00 purchase price with a 10% down payment, the buyer (occupying borrower) must bring in ,000.00 from their own funds, the other 00.00 can be a gift from a family member.

On a FHA loan, all of the down payment may be a gift from a family member, the borrower's employer or labor union, a charitable organization, a governmental agency or public entity that has a program to provide homeownership assistance to low- and moderate-income families or first-time homebuyers, or a close friend with a clearly defined and documented interest in the borrower.

The buyer's lender will need to document the gift funds by obtaining a gift letter, signed by the donor and borrower, that specifies the dollar amount of the gift, states that no repayment is required, shows the donor's name, address, telephone number and states the nature of the donor's relationship to the borrower. In addition, the lender will want documentation of the transfer of funds from the donor to the borrower, as follows:

1. If the gift funds have already been deposited into the homebuyer's bank account, the lender will want documentation of the transfer of the funds from the donor to the homebuyer by obtaining a copy of the canceled check or other withdrawal document showing that the withdrawal is from the donor's account. The homebuyer's deposit slip and bank statement that shows the deposit is also required.

2. If the gift funds are to be provided at closing:

a. If the donor is transferring the gift funds by certified check made on the donor's account, the lender will require a copy of a bank statement showing the withdrawal from the donor's account, as well as a copy of the certified check.

b. If the donor purchased a cashier's check, money order, official check, or any other type of bank check as a means of transferring the gift funds, the lender will require a copy of a withdrawal document or canceled check for the amount of the gift, showing that the funds came from the donor's personal account. If the donor borrowed the gift funds and cannot provide documentation from the bank or other savings account, the lender will require written evidence that those funds were borrowed from an acceptable source. The source of the gift funds may not come from a party to the transaction, including the lender. "Cash on hand" is also not an acceptable source of the donor's gift funds.

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