July 12, 2016
A reader asks, “Can I use gift funds from a family member to make my down payment on an FHA mortgage?”
This is a common question. FHA mortgages do require a lower down payment than many conventional loans, but a down payment is still required and must come from approved sources. Your lender will be required to verify the source of down payment funds, which must not come from uncollateralized loans, credit card cash advances, “payday loans”, etc.
The loan rules that affect down payments are found in HUD 4000.1 in a variety of places but our answers are coming from page 213-214, which begins by stating the FHA definition of a down payment. The rulebook calls the down payment a “Minimum Required Investment” or MRI for short:
“Minimum Required Investment (MRI) refers to the Borrowers contribution in cash or its equivalent required by Section 203(b)(9) of the National Housing Act, which represents at least 3.5 percent of the Adjusted Value of the Property.”
Furthermore, “The Mortgagee may only permit the Borrowers MRI to be provided by a source permissible under Section 203(b)(9)(C) of the National Housing Act, which means the funds for the Borrowers MRI must not come from:
(1) the seller of the Property;
(2) any other person or Entity who financially benefits from the transaction (directly or indirectly); or
(3) anyone who is or will be reimbursed, directly or indirectly, by any party included in (1) or (2) above.”
HUD 4000.1 does permit family members to provide gift funds for the down payment as long as those funds meet FHA standards (see above). Here’s what HUD 4000.1 says about the matter:
“Gifts may be provided by:
–the Borrowers Family Member;
–the Borrowers 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.”
And finally, HUD 4000.1 states that any time down payment funds are, “provided by someone other than the Borrower, the Mortgagee must also obtain documentation to support the permissible nature of the source of those funds.” We will cover how that procedure works in another blog post.
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:
http://www.fha.com/fha_loan_limits_widget
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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