All About Gift Funds
I get a lot of questions about gift funds. FHA and Conventional loans vary a bit in how gift funds are treated, but are largely similar. Let’s dive in!
The primary measurement here isn’t necessarily “How much is allowed as a gift?”, but rather “What is the minimum borrower contribution for this loan scenario?”.
If the minimum contribution is 0%, then you can use gift funds for all parts of the down payment and closing costs.
If the minimum contribution is 5%, then you will need to bring 5% of the purchase price from your own funds: gifts can cover the rest.
There is no minimum borrower contribution.
The short answer is that there is no minimum borrower contribution unless you are purchasing a duplex, triplex, or quadplex and putting less than 20% down. In that case you will need to provide 5% from your own funds.
Second homes cannot be purchased with FHA loans.
If you are putting less than 20% down, you will need to provide 5% from your own funds.
Gift funds are not allowable for investment property purchases.
Differences In Documentation
Conventional loans basically just have documentation requirements from the gift recipient not the donor. See below for Fannie Mae’s guidelines:
Gifts must be evidenced by a letter signed by the donor, called a gift letter. The gift letter must:
- specify the dollar amount of the gift;
- specify the date the funds were transferred;
- include the donor’s statement that no repayment is expected; and
- indicate the donor’s name, address, telephone number, and relationship to the borrower.
Verifying Donor Availability of Funds and Transfer of Gift Funds
The lender must verify that sufficient funds to cover the gift are either in the donor’s account or have been transferred to the borrower’s account. Acceptable documentation includes the following:
- a copy of the donor’s check and the borrower’s deposit slip,
- a copy of the donor’s withdrawal slip and the borrower’s deposit slip,
- a copy of the donor’s check to the closing agent, or
- a settlement statement showing receipt of the donor’s check.
When the funds are not transferred prior to settlement, the lender must document that the donor gave the closing agent the gift funds in the form of a certified check, a cashier’s check, or other official check.
For FHA loans, the donor must evidence the availability of funds with a bank statement. This is non-negotiable as it is written into the guidelines, so make sure your donor understands this. Here are the word-for-word guidelines:
(2) Standards for Gifts
(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
- a charitable organization;
(b) Donor’s Source of Funds
Cash on Hand is not an acceptable source of donor gift funds.
(3) Required Documentation
The Mortgagee must obtain a gift letter signed and dated by the donor and Borrower that includes the following:
- the donor’s name, address, and telephone number;
- the donor’s relationship to the Borrower;
- the dollar amount of the gift; and
- a statement that no repayment is required.
Documenting the Transfer of Gifts
The Mortgagee must verify and document the transfer of gift funds from the donor to the Borrower in accordance with the requirements below.
- If the gift funds have been verified in the Borrower’s account, obtain the
- donor’s bank statement showing the withdrawal and evidence of the
deposit into the Borrower’s account.
- If the gift funds are not verified in the Borrower’s account, obtain the certified check or money order or cashier’s check or wire transfer or other official check, and a bank statement showing the withdrawal from the donor’s account.