Federal Housing Administration loans offer cash-strapped buyers flexible qualifying guidelines that make purchasing a home more affordable. FHA-backed loans carry a government guarantee that reimburses lender losses in the event of default. You pay your FHA mortgage insurance monthly and at closing, in addition to your down payment and settlement costs. FHA helps to lighten your financial burden at closing by allowing you to cover the entire down payment with gifted funds.
FHA lenders require you to contribute a minimal down payment when buying a house -- usually 3.5 percent of the sale price. Borrowers with low credit scores of 500 to 579 may qualify for financing with an increased down payment of 10 percent. Down payment funds must either belong to you and come from your own bank account or be gift funds, which may stem from a bona fide donor who certifies that the money doesn't have to be repaid. In most cases, the donor must deposit the down payment gift into your bank account before settlement and provide a certified letter stating the gift amount.
The FHA specifies who qualifies to donate a down payment gift. A relative or friend with a close, family-type relationship to you can provide down payment funds, as well as your employer or labor union. Certain charitable organizations, government agencies and public entities offering homebuyer assistance programs can also provide a down payment gift. These donors must apply to obtain approval from the FHA before helping with the down payment. The FHA maintains a list of charities and agencies approved to participate in its programs.
Unacceptable Gift Sources
The FHA generally prohibits borrowing money to make the down payment. When the donor is an approved organization that provides assistance in the form of secondary financing, or a "silent second," you generally pay back the money when you sell, refinance or pay off the FHA loan. You can't use a credit card, a personal loan or borrow from friends or family to meet the down payment requirement. FHA lenders scrutinize your and your donor's account statements and deposit slips to ensure down payment funds aren't borrowed.
You may receive a gift amount that exceeds the down payment requirement for your FHA loan. The lender may count surplus gift funds as cash reserves, which boost your qualifications as a borrower. Lenders might consider substantial cash reserves as a compensating factor when justifying loan approval despite borderline credit or a high debt load. You can apply excess gift funds toward cash reserves except when financing a two- to four-unit property or when qualifying with nontraditional credit.
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