The Paper Trail:
Rules for Verifying Gift Funds on FHA Loans
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…
a. Obtain a copy of the withdrawal slip from donor’s account
b. Obtain a copy of deposit slip and bank statement showing the deposit into borrower’s account.
2. If funds are provided at the closing table…
a. Obtain a copy of withdrawal slip from the donor’s account
OR, obtain a bank statement showing the withdrawal from donor’s account
b. Must be paid in the form of a certified check
3. If funds are going to be “wired” at closing…
a. Donor to provide documentation of the wire transfer
4. If donor is borrowing funds...
a. Donor to document the loan
b. Funds were borrowed from an acceptable source—bank, credit union, home equity line of credit, etc.
c. 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.