For many first-time home buyers, a down payment can be a serious roadblock to the purchasing of a house. Even buyers who hope to buy with FHA loans may not be able to come up with the immediate cash to handle even FHA-sanctioned down payments, even if they could easily afford the payments on their loans. In cases like these, a parent, friend, or even an outside party might hope to help the buyer out by offering to cover the down payment for them. Gifts, however, can lead to increased scrutiny from the FHA.
While gifts are not expressly prohibited within FHA financing, there are very specific rules that must be followed. In this article, we will explore the situations in which a gift can be used to secure a property, as well as the cases in which the FHA will prohibit or penalize the buying party from utilizing a gift.
Sanctioned uses of cash gifts
The overarching rule that determines the use of gifts under FHA financing policies is that the giver of the gift cannot be benefiting at all from the gift, including in the form of repayment. The FHA refers to this as a “bona fide” gift. Bona fide gifts must essentially be considered genuine charity, and not an exchange between the giver and the receiver. Beyond this first rule, there are further qualifications that must be considered in order to determine if a gifting circumstance is approved by the FHA.
The first circumstance in which gifted money can be used to cover the down payment on a property is in the case of a family gift. Gifts from family members, both nuclear and extended, are cleared by the FHA for use, provided they follow the primary rule of no remuneration. Gifts from close friends who have a demonstrable and extensive relationship are also accepted similarly.
Another approved circumstance is when an employer offers to cover the down payment. This is very common for buyers who are relocating for a job that will cover certain moving expenses. Likewise, charity organizations are allowed to help buyers cover the down payment costs of FHA approved loans.
The last fully approved circumstance is when another government organization or program, such as economic stimulus programs which help homeowners, offers to cover the down payment. This is the circumstance most likely to get the least scrutiny since intra-government communication is already established.
Prohibited uses of gifts
Above and beyond the primary rule listed above, there are circumstances in which gifts are explicitly prohibited from being used towards FHA financed properties. The clearest example of this would be a circumstance in which the seller of the property gifted money to the buyer to negate the down payment prices. This circumstance is expressly prohibited and can actually lead to penalization of the buyer and seller.
Additionally, agents, brokers, and construction companies (in the case of a new construction) are all prohibited from gifting the buyers of a property cash for a down payment. Gifts from these sources can be penalized in a number of ways, which will remove the benefits that FHA financing brought in the first place.
Call Christopher Lechner for real estate help today
Navigating FHA policies can be difficult without the guidance of a skilled professional. Christopher Lechner is just that professional. With years of experience working with FHA financed properties, Christopher can get you all the information you need. Contact him today at (562) 221-0055 for help with your next real estate venture.