The Basics

• The FHA is an agency within the Department of Housing and Urban Development. It insures mortgages originated by approved lenders. FHA insurance protects lenders by reimbursing them in the event a homeowner defaults on their loan.
  
  To qualify as a bona fide gift, funds donated to the borrower must not require an expected or implied repayment to the donor by the borrower, says FHA Outreach. Funds may be used for FHA-allowable closing costs, including the 3.5 percent down payment. Surplus funds are counted as borrower reserves.
  
  

Function

• FHA's requirement that gift funds come from an acceptable donor without the need for repayment helps prevent inducements to purchase which may inflate the sales price or cause a borrower to purchase an otherwise undesirable property. Interested third parties, such as sellers, real estate agents, brokers or mortgage professionals associated with the transaction are prohibited from donating money to the buyer. Also prohibited are builders, private investors or any non-approved third party that may place a lien on the property.
  
  

Considerations

• Seller-paid contributions -- while limited to 3 percent of the sales price -- may be used to pay for certain borrower closing costs, however, they are not considered inducements to purchase. Seller contributions may cover the cost of the buyer's prepaid expenses, discount points, interest rate buydowns and the FHA Up-Front Mortgage Insurance Premium.
  
  Seller concessions, whether monetary or in the form of personal property, beyond the scope of the allowable items mentioned above, are considered inducements. Such concessions, as well as gift funds not meeting FHA requirements, "result in a dollar-for-dollar reduction to the lesser of the sales price or appraised value," says FHA Handbook 4155.1.
  
  

Requirements

• FHA requires a gift letter directly from the donor stating their relationship to the borrower, the dollar amount, that they have no interest in the sale of the property and that no repayment of the funds is required. The lender is responsible for documenting the transfer of all gift funds between the donor and borrower through escrow or the individuals' bank accounts.
  
  Acceptable sources of gift funds include: a family relative, close friend, an employer or labor union.