Tuesday, March 11, 2008

FHA Tip Gift Funds

FHA TIP-FHA allows a gift to be used for the 3% required down payment. You need to know that FHA is very strict in the documentation of the gift fund transactions. Each step of gift transaction must be verified from going out of the donors account to being deposited in the borrowers account and also include a gift letter. The transaction for the exact dollar amount must be verified going from the donors account to the Borrowers account. The verification of the transaction into the borrowers account must verify a balance to cover the required down payment and closing cost the borrower would need to bring to closing. Look at the 1003 (or 92900 HUD) details of transaction the dollar amount from the borrower, you have disclosed in this part of the application will be what the underwriter will want verified as assets.

I have provided two sample gift letters I found on the internet. The second gift letter I attached allows the donors bank to certify that the donor has enough funds to cover the gift without disclosing the donors balance. If you use this option to document the donors ability you would still need a copy of the donors check and a copy of the deposit slip showing the gift funds going to the borrowers account.

If you use a bank statement or account history to document the transaction keep in mind the underwriter will look at all deposits and if there is anything that looks unusual they will ask for verification of source of the unexplained deposits. Sometimes it maybe easier to use a VOD.

The following is additional information taken directly from the 4155.1 that you will find helpful

"Gift Funds. An outright gift of the cash investment is acceptable if the donor is the borrower’s relative, the borrower's employer or labor union, a charitable organization, a governmental agency or public entity that has a program to provide homeownership assistance to low- and moderate-income families or first-time homebuyers, or a close friend with a clearly defined and documented interest in the borrower. The gift donor may not be a person or entity with an interest in the sale of the property, such as the seller, real estate agent or broker, builder, or any entity associated with them. Gifts from these sources are considered inducements to purchase and must be subtracted from the sales price. No repayment of the gift may be expected or implied. (As a rule, we are not concerned with how the donor obtains the gift funds provided they are not derived in any manner from a party to the sales transaction. Donors may borrow gift funds from any other acceptable source provided the mortgage borrowers are not obligors to any note to secure money borrowed to give the gift.) This rule also applies to properties of which the seller is a government agency selling foreclosed properties, such as the Veterans Administration or Rural Housing Services. Only family members may provide equity credit as a gift on a property being sold to other family members. These restrictions on gifts and equity credit may be waived by the jurisdictional HOC provided that the seller is contributing to or operating an acceptable affordable housing program.

FHA deems the payment of consumer debt by third parties to be an inducement to purchase. While FHA permits sellers and other parties to make contributions of up to six percent of the sales price of a property toward a buyer's actual closing costs and financing concessions, this policy applies exclusively to the provision of mortgage financing. Other expenses paid on behalf of the borrower must result in a dollar-for-dollar reduction to the sales price. The dollar-for-dollar reduction to the sales price also applies to gift funds not meeting the requirement that the gift be for down payment assistance and is provided by an acceptable source. When someone other than a family member has paid off debts, the funds used to pay off the debt must be treated as an inducement to purchase and the sales price must be reduced by a dollar-for-dollar amount in calculating the maximum insurable mortgage.

If the gift funds are to be provided at closing:

a. If the transfer of the gift funds is by certified check made on the donor's account, the lender must obtain a bank statement showing the withdrawal from the donor's account, as well as a copy of the certified check.

b. If the donor purchased a cashier's check, money order, official check, or any other type of bank check as a means of transferring the gift funds, the donor must provide a withdrawal document or canceled check for the amount of the gift, showing that the funds came from the donor's personal account. If the donor borrowed the gift funds and cannot provide documentation from the bank or other savings account, the donor must provide written evidence that those funds were borrowed from an acceptable source, i.e., not from a party to the transaction, including the lender. "Cash on hand" is not an acceptable source of the donor's gift funds.

Regardless of when the gift funds are made available to the homebuyer, the lender must be able to determine that the gift funds ultimately were not provided from an unacceptable source and were indeed the donor's own funds. When the transfer occurs at closing, the lender remains responsible for obtaining verification that the closing agent received funds from the donor for the amount of the purported gift and that those funds came from an acceptable source. "

We will review DPA (Down payment assistant ) programs later