The Paper Trail:
Rules for Verifying Gift Funds on FHA Loans
(Updated 9-14-2015)
One of the issues that always come up is how much money your clients plan to use for their down payment. However, what is rarely discussed is, “where is the money coming from for the down payment and closing costs?”
When working with FHA buyers and getting them pre-approved, if they say they are getting all (or part) of the money from a gift, FHA requires a “paper trail.” I want to share with you exactly what is needed because this alone could hold up closing—or kill a deal.
The gift letter itself must contain the following verbiage:
· Name, address and telephone number of the donor
· The dollar amount of the gift
· The relationship of the donor to the borrower
· That no repayment is required
There are four ways to verify the transfer of the funds (only one is required ):
1. If funds are already in a borrower’s account then
a. Obtain a copy of the donor’s bank statement showing the withdrawal and
b. Evidence of the deposit into the borrower’s account.
2. If funds are not verified in the borrower’s account then
a. Obtain a copy of the certified check or wire transfer and
b. Obtain a bank statement showing the withdrawal from donor’s account
3. If funds are going paid directly to settlement agent then
a. Verify that settlement agent received funds from the donor for the amount of gift and
b. Verify that the funds were from an acceptable source.
4. If donor is borrowing funds then
a. Donor must document that funds were borrowed from an acceptable source—bank, credit union, home equity line of credit, etc.
b. Cash on hand is NOT an acceptable source of gift funds
Please call me if you find yourself working with FHA borrowers who mention they are getting money from relatives to help them buy a home. We’ll need to let them know what “paper trail” they will need to follow.