FHA gift letter: HUD’s donor rules and the transfer proof underwriters want

An FHA gift letter is the written record a lender keeps when a gift helps pay for a home bought with an FHA-insured mortgage. HUD Handbook 4000.1 lists four items it must carry: the donor’s name, address and telephone number, the relationship, the dollar amount, and a statement that no repayment is required (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)). The donor and the borrower both sign and date it (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)).

Handbook 4000.1 consolidates FHA’s earlier handbooks and mortgagee letters into one source (HUD, Single Family Housing Policy Handbook 4000.1 information page). Older FHA handbook pages still found online, such as the retired credit analysis chapters, are superseded, so check any rule they quote against the current handbook.

The letter is only the first half of the file. The lender must also trace the money from the donor to you or to the settlement agent, and make a reasonable call that the funds did not come from an unacceptable source (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)).

The donor fills in and signs the letter, and the borrower countersigns it. On FHA loans that second signature is not optional, so plan a moment when both of you can sign. Many loan officers send their own FHA gift form; the template below follows the same four HUD items if yours does not. The donor also supplies the bank record of the withdrawal, and the borrower supplies the record of the deposit.

1. Tell your loan officer early that part of your funds is a gift, and ask for the lender’s FHA gift form.
2. Check that the donor fits one of HUD’s accepted donor types, and how the lender wants a close friend’s tie to you documented.
3. Fill in the letter with the donor, using the exact amount, then have the donor and every borrower sign and date it.
4. Agree on the timing: money in your account before settlement, or sent by the donor straight to the settlement agent.
5. Collect the matching proof for that timing and send it with the letter.

• Only the donor’s signature. HUD wants the borrower’s signature and date on the same letter.
• Gift money that started as cash kept at home. HUD does not accept cash on hand as the donor’s source.
• Your bank statement showing a deposit, with nothing from the donor’s side showing the withdrawal.
• A friend listed as donor with no explanation of how the relationship is documented.
• A seller who is not a relative offering a gift of equity, which FHA limits to family sales.

HUD names the donor types it accepts, and the list is wider than a conventional loan’s. Pick the matching row and write it in the relationship line of the letter.

A family member, in HUD’s handbook, is defined regardless of sex or legal marital status (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)). The list includes a child or stepchild, a parent or grandparent, and a stepparent or step-grandparent (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)). It also covers a spouse or domestic partner, a legally adopted child, and a child placed with you for adoption (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)). Children placed with you by a child welfare agency, and the parents or grandparents who cared for you under such a placement, are on it too (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)).

Brothers, sisters, step-siblings, uncles, aunts and in-laws are on the list too (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)).

Relatives such as cousins, nieces and nephews are not on that list. If one of them is your donor, ask the lender whether it will treat them as a close friend with a documented interest.

The paper trail depends on when the money moves. HUD gives one list for gifts verified before settlement and another for gifts paid to the settlement agent (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)).

If the money reaches you first, the lender needs one of these records (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)). Each of the first three must come with proof of the deposit into your account.

• The donor’s bank statement showing the withdrawal.
• A copy of the donor’s canceled check.
• A copy of the donor’s withdrawal receipt.
• Evidence of an electronic transfer from the donor’s account to yours.

1. If the donor pays at closing instead, the payment to the settlement agent must be an electronic transfer from the donor’s account, a bank certified check, a cashier’s check or another official bank check (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)).
2. If the gift is land, the lender needs proof the donor owned it and evidence that title passed to you (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)).
3. Whatever the route, keep the donor’s statement that shows the money sitting in a bank account first, because cash on hand is not an acceptable donor source (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)).

A gift of equity is a price below market value, where the seller gives you part of the home’s equity instead of cash. Under FHA rules, only family members may give equity, and only on a home sold to other family members (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)).

The paperwork is the same letter: names, contact details, relationship, the dollar amount of the equity, and no repayment, signed and dated by the seller and you (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)). The equity figure should match the gap between the agreed price and the appraised value on the sales contract.

The minimum required investment is the cash you must put into an FHA purchase, at least 3.5 percent of the adjusted value of the home (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)). A gift from an accepted donor can cover it, but none of it may come from the seller or anyone else who benefits from the sale (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)).

HUD calls those people interested parties: sellers, real estate agents, builders, developers, lenders and others with a stake in the deal (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)). Their help is capped at 6 percent of the sales price, goes toward closing costs and similar items, and may not fund your minimum investment (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)).

On a manually underwritten loan, surplus gift money does not count as cash reserves (HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity)). Ask the loan officer how your file is being underwritten before you size the gift.

The general mortgage gift letter guide covers the conventional side in depth, and the donor’s gift tax questions too. Here is where an FHA file parts ways with a Fannie Mae one.

• HUD Handbook 4000.1, II.A.4 Gifts (Personal and Equity): Lists who may give FHA gift funds, rules out cash on hand, requires a gift letter signed and dated by donor and borrower, sets the transfer evidence before and at settlement, and limits gifts of equity to family members.
• HUD, Single Family Housing Policy Handbook 4000.1 information page: Handbook 4000.1 is a consolidated source of FHA single family housing policy: hundreds of FHA handbooks, mortgagee letters, housing notices and other policy documents were consolidated into it.
• Fannie Mae Selling Guide B3-4.3-04, Personal Gifts: On a conventional loan the gift letter is signed by the donor, donors are relatives or people in a familial-type relationship, donations from entities fall under the grant rules of B3-4.3-06, and a 5% own-funds contribution applies to some two- to four-unit homes and second homes.