A question we regularly hear from people looking for a way to finance their next home is whether they can borrow the down payment on their Federal Housing Administration-insured mortgage loan from someone else, like a friend or relative.

Technically? No. 

It is the expectation of repayment that is the difference between a borrowed sum and a gifted sum. It is generally perceived that borrowing money means that you will have to repay the money, with or without interest, by a certain time. Whether the deal to borrow money was an oral agreement with a loved one or a loan from a bank, the assumption that the money will be paid remains the same.

As such, it is not allowed when it comes to FHA down payments.

You Can Use Monetary Gifts

The Department of Housing and Urban Development (HUD), which is the body that oversees the FHA loan program, defines gifts in their handbook as “contributions of cash or equity with no expectation of repayment.”

This means it is perfectly acceptable to receive money from a third party and to use that money for your down payment or closing costs. If there is no expectation of repayment, it is entirely permissible.

There just needs to be a gift letter signed and dated by the donor and borrower that stipulates that there is unequivocally no expectation of repayment as it relates to the gift. In that regard, the lender, whether the loan is a government-subsidized FHA loan or a regular mortgage, can then feel more secure about your financial situation.

The transfer of the gift must also be documented in the form of bank statements, official checks, and so on. In some cases, the gift may be forwarded directly to the settlement agent. 

Who Can Give Me Gifts?

The HUD handbook also lists that the following can give a gift of financial endowment to a prospective borrower:

• A relative
• The borrower’s employer or labor union
• A close friend with a clearly defined and documented interest in the borrower
• A charitable organization
• A government agency or public entity with programs providing homeownership assistance to either low-to-moderate income families or first-time homebuyers

Why is a Down Payment Necessary? Can’t I Just Pay the Value Over Time?

The purpose of a down payment, according to the HUD, is to mitigate mortgage credit risk. This risk refers to the possibility of the borrower being unable to keep up with their mortgage payments.

In such a situation, they are likely to fall into foreclosure.

People with smaller down payments are statistically more likely to default or fail on their payments. Conversely, people with larger down payments are less likely to default.

Down payments are a way for any lender to share the load of the risk with the borrower. Therefore, a larger down payment means less risk for the lender.

FHA Loans and Down Payments with Community Mortgage

However, you decide to go about financing your home, it is important to be aware of all the little nuances and ways you can benefit from the law. At the very least, you’ll have more options; at best, you could even reduce your cost. After all, knowing is half the battle and gets you miles closer to your family’s dream home.

For more information on FHA down payments and loans, we at Community Mortgage have the expertise and resources you need. We are a San Diego, California-based company that’s happy to help you get one step closer to your dream home. Send us a message today or call us at (619) 692-3630!