FHA Gift Fund Policy

Gifts from charitable organizations will not be recognized by HUD to constitute down payment assistance programs. A charitable organization is understood as any organization with an IRS 501(c)3 status.

Since gifts are, by definition, given voluntarily and with no conditions or compensation in return, the term “gift” does not apply to anything that is given on condition.

“Cash on hand” and “Cash saved at home” are prohibited as sources for gifts. While a donor can borrow the money that was gifted to the borrower, the borrower is under no obligations to the source of the funds.

A gift is considered an incentive to purchase a property if it comes from anyone with an interest in the property’s sale, such as a real estate agent or broker, a builder, or the seller of the property. In this case, the sale price must be reduced by the amount equal to the gift. This reduction also applies if someone outside the borrower’s family is paying the borrower’s debts.

The transfer of funds from donor to borrower must be documented by the lender, which can be done by obtaining a copy of the donor’s withdrawal slip or canceled check together with a deposit slip or bank statement from the borrower that shows the transaction. If the donor uses a cashier’s check, the lender must furnish a copy of the check and a withdrawal slip with the donor’s account number to prove that the donor purchased the check.

If, before closing, these funds do not get deposited into the account of the borrower, the lender will specify that the instructions above must be furnished to the closing agent in the escrow closing instructions. Also, the lender will ensure that documentation is given by the closing agent to show that all procedures have been followed. The documentation will be submitted together with the insuring file that goes to the HOC.

The insuring file must also include a gift letter that contains the following:

1. Dollar amount
2. Name of donor
3. Signature of donor
4. Address
5. Phone number
6. Relationship to borrower
7. Name of borrower
8. Signature of borrower
9. Statement asserting no repayment is necessary
10. Language specifying that the amount did not come from any person or organization with an interest in the sale of the property.

The same rules concerning documentation apply to gifts that come from a non-profit or municipality via a down payment assistance program. The lender will obtain proof of the dollar amount from the donor together with evidence that the borrower is not required to repay it.

Evidence of a funds transfer would be verified with the appropriate reference on the HUD-1 plus evidence of wire receipt by the settlement agent (any copy of a transfer instrument will also suffice). The cost for processing a down payment assistance program gift cannot be included as a part of the cash investment of the borrower.