Why sourcing gift funds is crucial

Having the ability to use a down payment gift from a friend or family member is wonderful. In today's real estate and employment economy it is almost crucial in a small percentage of cases. During a time when many are selling below payoff and needing to bring the deficiency to the closing table they may be greatly decreasing their available cash to close. When this happens having a gift from an employer, family member or friend can mean the difference between getting that home and not getting the home.

Many will argue if a buyer does not have the down payment they do not deserve the home. Continue your argument and feel free to comment here but only if you include actual facts and data to evidence your contrarian view. Not having down payment does not automatically translate into future default - especially in today's economic climate.

Who can give a down payment gift?

Any direct relative such as a sibling, parent or child can give a gift without any further explanation as can an employer. Distant relatives and friends can only give gifts if they have a vested interest in the buyer making this purchase. The goal is to make sure no party with an interest in the sale of the property (builder, seller, agent) are providing the gift to the buyer.

The borrower must list the name, address, telephone number, relationship to the homebuyer, and the dollar amount of the gift on the loan application or in a gift letter for each cash gift received.  If sufficient funds required for closing are not already verified in the borrower’s accounts, document the transfer of the gift funds to the homebuyer in accordance with instructions described in Handbook HUD 4155.1 REV-5

Often the most challenging aspect of the gift is having the donor understand they will be required to provide evidence of their ability to give which may include showing some private information to the underwriter. It is often a battle, especially with older generations who have been well steeped in protecting private data. However the HUD rules are as follow:

Documentation Requirements.  The lender must 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 must document the transfer of funds from the donor to the borrower, as follows: 

1. If the gift funds are in the homebuyer's bank account, the lender must document 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 transfer of the gift funds is by certified check made on the donor's account, the lender must obtain 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 donor must provide 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 donor must provide written evidence that those funds were borrowed from an acceptable source, i.e., not from a party to the transaction, including the lender.  "Cash on hand" is not an acceptable source of the donor's gift funds. 

Regardless of when the gift funds are made available to the homebuyer, the lender must be able to determine that the gift funds ultimately were not provided from an unacceptable source and were indeed the donor's own funds.  When the transfer occurs at closing, the lender remains responsible for obtaining verification that the closing agent received funds from the donor for the amount of the purported gift and that those funds came from an acceptable source. 

NOTE:  FHA does not “approve” down payment assistance programs in the form of gifts administered by charitable organizations (i.e., nonprofits).  Mortgage lenders are responsible for assuring that the gift to the homebuyer from the charitable organization meets the appropriate FHA requirements and the transfer of funds is properly documented.  In addition, FHA does not allow nonprofit entities to provide gifts to homebuyers for the purpose of paying off installment loans, credit cards, collections, judgments, and similar debts.

Ken Cook - Community Outreach Leader Southeast Region (I make friends, that's my job :) - FHA, USDA, VA and Conventional Home Loans (678) 439-8683 NMLS ID 208452

My employer: AmericaHomeKey, Inc., 2300 Windy Ridge Parkway, 8th Floor North Tower - 840N, Atlanta, GA 30339. NMLS ID 102930. Georgia residential mortgage licensee 23191. Equal housing lender.