The FHA loan program requires borrowers to make a down payment of at least 3.5%. But it also allows you to use gift money from an approved third party, like a friend or family member. The gifted funds can be applied to your down payment or closing costs.
This guide explains the rules and requirements for using down payment gifts with an FHA loan, including the gift letter that’s required in all cases.
FHA Loans Require You to Put Down 3.5%
The Federal Housing Administration (FHA) loan program requires home buyers to make a down payment of at least 3.5% of the purchase price or appraised value.
HUD Handbook 4000.1, which is the official FHA guide for mortgage lenders, states:
“In order for FHA to insure this maximum mortgage amount, the Borrower must make a Minimum Required Investment (MRI) of at least 3.5 percent of the Adjusted Value.”
For a median-priced ($354,000) home in the U.S., a down payment of 3.5% would add up to more than $12,000. In a more expensive real estate market, it could easily exceed $20,000.
Acceptable sources for these funds include: cash saved at home, checking and savings accounts, retirement accounts, stocks and bonds, and gift money from a third party.
Using Gift Money for the Down Payment
The down payment for an FHA loan doesn’t necessarily have to come out of your own pocket. It could be gifted to you by a relative, a close friend, or even an employer.
Mortgage lenders refer to this as “gift money” or a “down payment gift.”
According to the Federal Housing Administration, borrowers who use FHA loans can obtain gift money from a variety of sources. Acceptable donors include:
- A family member
- An employer or labor union
- A close friend with a “documented interest” in the borrower
- A charitable organization
- A governmental agency or public entity that assists low- or moderate-income families or first-time buyers
For example: a young couple buying their first home with an FHA loan could borrow money from either of their parents, to cover some or even all of the minimum down payment.
On the other hand, gift money cannot come from the seller or from any “person or entity who financially benefits from the transaction.” FHA rules prohibit the seller from contributing money toward the buyer’s minimum required down payment.
This is an important benefit, because it helps home buyers overcome what is often the biggest hurdle to homeownership: the upfront costs.
But like all things in the FHA loan universe, there are specific rules and requirements for borrowers who use gift money. And one of those rules requires a down payment “gift letter” from the person who is gifting the funds.
Minimum Requirements for the Gift Letter
If a person or organization provides you with gift funds to help cover your FHA loan down payment or closing costs, that individual or organization must also prepare and sign a “gift letter” that goes into the loan file.
The specific requirements for an FHA gift letter can be found in HUD Handbook 4000.1, also known as the Single Family Housing Policy Handbook.
But that handbook contains nearly 2,000 pages of information, most of it geared toward mortgage lenders instead of borrowers. So we’ll break it down for you.
Part II Section A-4 of the official handbook explains the acceptable sources for down payment funds with an FHA loan, and provides the following definition:
“Gifts refer to the contributions of cash or equity with no expectation of repayment.”
Those last four words are important. This means the money being provided must truly be a gift, and not just a short-term loan. The donor must certify (in the form of a signed letter) that they do not expect any form of repayment.
Here are the requirements for an FHA down payment gift letter:
- the name of the person donating the money
- the donor’s address and phone number
- the donor’s relationship to the borrower / home buyer
- the specific dollar amount being donated
- a statement that no repayment is expected
- signature from both the donor and the borrower
The letter must be signed, dated, and delivered to the home buyer’s mortgage lender. As the HUD handbook states: “The Mortgagee [lender] must obtain a gift letter signed and dated by the donor and Borrower that includes” all of the information listed above.
A Basic Gift Letter Template
Regarding the content of the FHA down payment gift letter, our advice is to keep it short and sweet while checking all of the boxes mentioned above. Don’t overthink it or add unnecessary information. Simpler is better.
Here’s an example gift letter template that meets all of the FHA’s requirements. But be sure to check with your lender for any additional requirements.
I, John Doe, do hereby certify the following:
I, John Doe, have made a gift of $8,000 to my daughter, Jane Doe. I do not expect any form of repayment for these gifted funds, either in the form of cash or future services.
The gift is to be applied toward the purchase of the property located at:
514 Johnson Street, Willowdale, PA 19002
The source of funds for this gift is my personal savings account.
Bank name: ABC Bank
Type of account: Savings
Account No: 54321 *
Relationship to borrower: Parent
John Doe
499 Maple Avenue
Brooksville, DE 19801
(987) 555-1234
[Donor signature and date]
[Borrower signature and date]
* Note: The official FHA loan guidelines do not specifically state that the letter must include the donor’s bank account number. But the lender might require it. Be sure to check with your lender before creating a down payment gift letter, to see what they require.
This gift letter template meets all of the requirements listed earlier. It includes the name of the donor and their relationship to the borrower. It mentions the amount being gifted and that there is no expectation for repayment. And it includes signatures from both parties, with the donor’s full contact information.
The Lender Must Verify the Deposit
Gifts are an acceptable source of down payment and closing cost funds for FHA loans. Short-term loans, however, are not an acceptable source.
The mortgage lender must verify that the funds were not obtained through any new form of debt (i.e., a loan). If the money being provided creates an additional debt obligation for the borrower, it will not be acceptable for down payment purposes.
If you use down payment gift money with an FHA loan, your lender will probably want to see withdrawal documents, bank statements, or deposit slips that show the transfer of funds. They do this to verify the “paper trail” that shows where the money came from.
If the gift funds haven’t yet been deposited into the borrower’s account, HUD advises lenders to “obtain the certified check or money order or cashier’s check or wire transfer or other official check evidencing payment to the Borrower or settlement agent, and the donor’s bank statement evidencing sufficient funds for the amount of the Gift.”
Regardless of when the down payment gift was provided to the borrower (or to the escrow agent), the lender will have to make a “reasonable determination” that the funds were provided by an acceptable source.
Disclaimer: Mortgage transactions can vary from one borrower to the next due to a number of factors. So portions of this article might not apply to your situation. If you have questions about using gift money for your down payment, contact a HUD-approved mortgage lender. You could also contact the FHA Resource Center by emailing answers@hud.gov, or by calling (800) CALL-FHA (225-5342).