Down Payment Gifts for FHA Home Loans

Using down payment gifts for FHA Loans is the beauty of the FHA 203(b) mortgage. This loan product requires a 3% minimum down payment. This is an awesome product for first time home buyers.

The use of these gift funds can be from a variety of sources.

Where can these gift funds come from?

Now I’m going to try and make this simple. First, what you need to know is, there’s no FREE LUNCH in this world. Using gifts for the down payment to satisfy the FHA underwriter is just a fancy way to create the famous ZERO MONEY DOWN home loan.

In most cases you’ll be borrowing money for your down payment. Unless of course you’re working with a loan officer that can help you get these funds from the seller. It works out the same, but you can actually ask the seller of the house you’re buying to give you these funds. Don't be surprised, this happens all the time! But you need a knowlegeable loan officer to help you do this.

You can use 100% down payment gifts for the FHA home loan. It can come from your relatives, a labor union or a charitable organization. The relative gifting you the funds has to be immediate family only.

Family Member

Many first time home buyers have a family member, usually a parent that can or is willing to help you buy a house. Maybe they’re tired of you living with them! (ha ha) At any rate, it’s normally not too hard to come up with the down payment gifts to get your house bought. With the down payment being just 3% this is a small amount when compared to the conforming loans that have much larger requirements.

Labor Unions

Although I’ve never seen it, in some cases if the company you work for has a labor union, they may have a fund for down payment gifts. You’ll have to check this out for yourself.

Charitable Organizations

Most of these funds come from Charitable Organizations. The majority of transactions that I’ve seen have been done this way. It works much like a gift from a family member with the exception of one thing. Well, a few things really.

They make the donation equal to your down payment requirement, but they want a charitable gift given back at the closing with a fee attached. Remember that I said there’s no FREE LUNCH?

Here’s How Charitable Donations for Down Payment Gifts Work

The Charitable Organization is not a party to this transaction. They are a third non-interested party. Their whole function as a non-profit organization is to help people become home owners. At face value this sounds good, you know, like free money. Nope!! Not at all.

You the buyer have to get a document signed by the seller that he’ll make a charitable contribution to this non-profit organization. The donation would be equal to your down payment gifts plus a fee of around $300.

Here’s what happens at the day of closing. The Charitable Organization wires the down payment money to the title company that handles your closing. Then, after you close, the title company wires the money back to them, with their fee, the same day.

FHA allows this to happen because the Charitable Organization is one, non-profit, two, not a party interested in this transaction. You see, the seller and their realtor are too close to the deal so they cannot make an outright use of these funds because it would look like they did it just to get the deal closed.

The same goes for you the buyer and your realtor. Perhaps now you can see why only a relative, labor union or Charitable Organization can offer these type of funds. None of them really have a vested interest in the transaction.

I call the use of Charitable Organizations funds for down payments a legal way to launder money. It’s allowed by FHA so there’s nothing wrong with it.

One thing that I forgot to mention. The source of these funds must be proven. Some people try to get fancy on this and fool somebody. Don’t bother, it’ll get discovered where the money came from.

If it’s a family member the funds have to be deposited into your account before closing. Also to prove where they came from, the family member may have to offer a copy of a bank statement to prove they had the money to use for your down payment gift funds.

All the other sources are proven by documents from the organizations. These documents are provided by them and are quite simple to fill out.

Don’t worry, sellers do not have a problem using these charitable organizations and making the required contribution. Keep in mind they want to sell a house. Chances are they are getting ready to buy another one and need the proceeds of the sale to buy it.

Now, as I mentioned above, if you’re working with a loan officer worth his/her salt, they’ll be able to help you get all this done with the least out of pocket money to you.

This just scratches the surface of how these down payment gifts work. I’m hopeful by now you can get an idea that you can buy a house with down payment gifts. You just have to be educated on how they work, what you can do to benefit yourself by using them.

If you want to learn more about down payment gifts or are interested in first time home buyer grants, click on the link.

Or return to First Time Home Buyer Solutions home page.