FHA Gift Limits
The Federal Housing Administration (FHA) arose from a need to increase homeownership in the U.S. during difficult economic times. Borrowers with an income below certain limits become homeowners by allowing the use of gift funds to make the down payment on a purchase. The government agency sets limitations on the donation of gift funds.
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Function
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Congress created the agency in 1934 to serve low- to moderate-income households that conventional lending institutions would not finance. Borrowers with little or no reserves may receive funds needed to close from a relative, an employer or labor union, or government agency approved by the FHA. For funds to be considered gifted, the donor must certify that they don't expect the funds to be paid back.
Donor Limitations
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Gift fund donors are limited to uninterested parties. A seller, agent, homebuilder or anyone who stands to benefit from the sale of the property is prohibited from contributing gift funds, as this would be considered an inducement to buy and against FHA policy.
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Benefits
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Any gift funds in excess of what the borrower requires to close may be counted as reserves. FHA considers reserves beneficial to the borrower and a compensating factor for any of the borrower's shortcomings in their eligibility. There is no limit to the amount of gift funds that may be applied towards reserves.
Prevention/Solution
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In order to verify that gift funds come from a bona fide source, the FHA limits who can donate and imposes a paper trail requirement. For instance, sellers may not gift funds to the buyer via a charitable organization. Acceptable donors must provide documentation in the form of account statements and a gift letter, demonstrating that the funds belonged to them, and are not a loan to the buyer. The gift letter states the donor's name, address, telephone, relationship to borrower and gift amount.
Considerations
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The donor is not limited in his source of gift funds. In general, the FHA is not concerned with where the donor got the money so long as they money did not come from a party to the transaction. Donors may borrow gift funds but must not obligate the borrower to pay the money back, according to the FHA Handbook.
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References
- Photo Credit gift image by Horticulture from Fotolia.com
