FHA Mortgage: When Your Downpayment is a Gift

There has been so much fraud discovered in the FHA program allowing gift funds for downpayment that Lenders and borrowers are required to absolutely document every step of the gift transaction to prove it was legitimate.

Here's how it works: FHA allows the required downpayment to be a gift from someone who would logically be concerned about housing for the borrower. This means parents, siblings, other close family members. It can also mean employers in some circumstances, or even very close friends or roommates if the relationship can be verified.

Does "relationship be verified" sound like an invasion of privacy? It is often viewed that way, but the spirit of the HUD regulation is that unallowable donors be prevented at all costs from participating in the gift. Let's explore what HUD/FHA is actually trying to accomplish so we can make better decisions about how to document the gift funds.

It has been proven statistically that homeowners with zero funds in the transaction are more likely to default on the loan and suffer foreclosure. An FHA transaction is already set up to require very little down; often the 3-5% required is less than a security deposit on a rental unit.

If a Realtor or Builder or Property Seller were to give the Homebuyer the gift for the downpayment in order to make the deal go through, then all parties involved would benefit in some way from the transaction (commission, sale, new home), but the new Homeowner would come away with very little regard for the responsibility of ownership.

Buying and maintaining a home costs something. There is nothing essentially wrong with getting into a home for zero$ down, but you must be financially prepared to continue living there. If people who will profit from the deal are allowed to use some of their profit to leverage unqualified owners into homes, defaults and foreclosures will increase and the Housing Insurance fund will suffer.

OK, that's the reasoning behind the rules and regs. But HUD / FHA are there to promote Affordable Housing, so there must be allowances for legitimate circumstances. That is where the gift from family comes in. It is assumed that when a family member gives a gift of downpayment funds, they are aware of the financial circumstances of the buyer and are also willing and able to help out if need be.

There is even a provision for family members LENDING the buyer the downpayment, as long as the repayment terms are formally stated in writing and the payment terms are included in the buyers debt ratio for qualifying purposes.

Now it's time for documenting the transaction. The Lender is going to require (based on HUD / FHA regulations) that every step of the transaction be verified as happening exactly as represented. The loan file must have:

• A gift letter written and signed. It must say exactly what FHA rules call for, so wait until the Lender provides you with the right form.
• Proof that the donor has the $$ money to give and that it truly belongs to them. This can be a Verif from the Bank or a copy of a bank statement showing the funds in the account longer than just recently. (This is where you begin to prove that the Realtor, Builder, or Seller did NOT give the money to Mom and Dad to give to you).
• Trail the $$ funds as they move from Donor's account to your account or to the Title Company to hold in escrow. This is no time to play games. The check should be from the same account as above. If it is a certified or cashiers check, it will have the name of the Remitter on it. The actual transfer of the $$ is the most critical element of proof.
• Title Companies and Escrow Agents are required by Federal Law to verify that nothing sneaky happens at the closing table to undo any of the above items. The Realtor, Builder, or Seller can NOT pay Mom and Dad back at closing. Neither can you. No side deals.

If you need assistance and you do not have a family member who can gift funds to you, look into City programs you might qualify for. Many communities have Development agencies who work closely with HUD to create programs for helping buyers get homes. Another source of downpayment funds could be a Non-Profit Agency approved by HUD / FHA to "gift" funds. Ask your lender or Realtor when you are Prequalifying for a loan.

Judi Moore authors Ask The Underwriter at 2rHouse.org and personally answers questions from readers about FHA mortgages and mortgage advice in general.

Wachovia Posts Loss, Exits Wholesale Origination Business Mortgageorb, CT - Jul 22, 2008 By MortgageOrb.com on Tuesday 22 July 2008 Consistent with previously announced expectations, Charlotte, NC-based Wachovia Corp. has reported a net loss in ...

DEBT ADVISOR Columbia Daily Tribune, MO - Jul 21, 2008 Second, your mortgage-refinance issue is just the tip of the iceberg. Many people don’t know a negative credit history also will hurt you if you have to ...

Market rescue, round two Livemint, India - Jul 14, 2008 The stocks of the two mortgage refinance institutions fell to levels last seen 15 years ago on concerns about their bearing the brunt of the exposure to ...

Tips on obtaining money through refinancing Fall River Herald News,  USA - Jul 3, 2008 Here are a couple of pointers for those considering mortgage refinance to take cash out of their home: The traditional way of judging the market value of a ...

Reuters

Foreclosure-rescue legislation benefits both borrowers, lenders Arizona Republic, AZ - Jul 12, 2008 by Julie Hirschfeld Davis - Jul. 13, 2008 12:00 AM AP The foreclosure-rescue legislation moving through Congress would let financially strapped homeowners ... US housing agency expands mortgage aid program Reuters all 81 news articles

HUD Bolsters Foreclosure Prevention in Detroit Area, Announces ... DSNews.com, TX - Jul 10, 2008 Preston's Detroit announcement comes on the heels of a Tuesday conference call, where HUD announced the expansion of its FHASecure mortgage refinance ...

Refinance.com Expands National Footprint Business Wire (press release), CA - Jul 7, 2008 ... mortgage applications in Arkansas, New Hampshire and New Mexico, further expanding its national footprint as a leading mortgage refinance lender. ...

Don't Blame Canada Conde Nast Portfolio, NY - Jul 9, 2008 Did Alan Greenspan get a commission on your mortgage refinance? Why would anyone think that war spending is an economy killer? ...

Best Syndication

Low Credit Score Home Mortgage Loan Refinancing Best Syndication, CA - Jun 30, 2008 In any case, what you need to do is make sure that the terms of the mortgage refinance loans that you are being offered match your needs and will produce ...

Inside Wall Street: That Ticking Sound You Hear Out in the ... istockAnalyst.com, OR - Jul 18, 2008 The fundamentals of economic strife based on the disastrous collapse of the US housing market will not get better any time soon. ...