FHA Down Payment Requirements
One of the great many benefits of buying a home with an FHA loan is the smaller amount of money that is required to exit your bank account throughout the homebuying process.
In addition to FHA permitting seller paid closing costs up to 6% of the purchase price, FHA loans require only a 3.5% down payment. While 3.5% is relatively small when compared to conventional loans with 5% to 20% down payments, 3.5% is $3,500 for every $100,000 in purchase price.
Our FHA loan calculator demonstrates how quickly that adds up. It can be difficult to obtain for families with everyday expenses that prevent them from saving as much as they’d like.
Fortunately, FHA understands many of their buyers are responsible borrowers who simply haven’t had the time to accumulate the savings needed to buy a home. Therefore, FHA permits homebuyers to make their down payment from proceeds received in the form of a gift.
What is an FHA down payment gift?
If I am buying a $300,000 home with an FHA loan, my minimum required investment – down payment – is $10,500. If I choose to make this down payment by having an acceptable source give me the money, this will fall under the FHA down payment gift guidelines.
Perhaps the most important thing to understand when using gift contributions when making your down payment is that the funds indeed need to be a gift with no expectation of repayment. A gift is not something that is paid back. There can be no agreement or arrangement to repay the friend or family member who gifted the down payment.
Who can give me my down payment?
FHA limits the persons and/or entities it permits to give funds to be used for a down payment. Parties with a financial interest in the sale of the property, for example, are not an acceptable down payment source. This includes the seller, real estate agent(s), lenders, loan officers, or other parties who may benefit from the home’s sale.
In addition to family members, acceptable sources of gift funds defined by HUD’s FHA handbook include the borrower’s employer or labor union, a close friend*, charitable organization, or a government agency’s homeownership assistance program for first-time buyers and/or low income families.
*Documented interest in the borrower showing a clearly defined relationship is required.
FHA Handbook 4000.1 p237(a)Acceptable Sources of Gifts Funds Gifts may be provided by: The Borrower’s Family Member; The Borrower’s 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 homeownership assistance to: Low or moderate income families; or First-time homebuyers
The donor must provide a gift letter to the borrower. Your lender will request this and specify what the letter must say. In addition to the donor’s name, address, and contact number, the letter must specify the borrower/donor relationship, the amount of the gift, and that the funds are a gift that is never required to be repaid.
The gift must be well documented, meaning cash is not an acceptable source of funds, and bank statements showing receipt and withdrawal must also be provided.
Saving for a home is difficult. It takes time and sacrifices. FHA understands this and permits those closest to you to assist in your dream of becoming a homeowner. FHA down payment gifts expedite ownership for those of us with expenses that make saving difficult.