The United States Federal Housing Administration backs mortgages for home buyers who might otherwise not qualify for a loan. FHA protects lenders against losses if a homeowner falls behind or can't pay off the loan. The mortgage insurance encourages banks to lend money on more favorable terms than regular mortgages. If you get an FHA-backed loan, you need to put down only 3.5 percent of the price as a down payment. Even so, you may need more help for down payments from sellers, family members and others. This help comes through selling below market value and through cash. FHA rules guide who can help you and how you can use their generosity.
A home's equity is the difference between its value and what is owed on it. When you make a down payment, you create equity since you don't have to borrow the full price of the home. A seller endows you with a "gift of equity" by selling the home for less than its value. You borrow enough to pay the below-market price; the seller in effect makes your down payment and gives you the equity. The donor may not expect repayment; otherwise, it is not a gift.
Gift of Equity Guidelines
Only a seller in your family or, with the Department of Housing and Urban Development's blessing, a seller (even if non-family) who contributes to or runs an affordable housing program can give you a gift of equity on an FHA-backed loan. FHA doesn't set a ceiling or floor on the gift of equity, although the purchaser must have 3.5 percent of the price as a down payment. However, the donor faces a gift tax if the gift of equity, by itself or in combination with other gifts to anyone, is more than $13,000; the gift counts as taxable income to you.
Cash Gift Guidelines
You can get down payment help for FHA loans with a cash gift rather than a gift of equity. The money can come from your relatives, your employer, a charity, or a governmental or public agency helping those with modest or little income or first-time home buyers. Cash from the seller, real estate broker or agent is an inducement to buy and causes the home price to drop by the amount of the donation, unless the seller contributes to or runs an affordable housing program and gets a green light from the Department of Housing and Urban Development.
You may use a gift for the down payment and closing costs. Your family can pay off your credit cards, judgments, existing loans and other debts, but if anyone else pays them off, the price of the home will go down by the amount of the debts paid off. The seller may pour in up to 6 percent of the price as closing costs; FHA treats anything above 6 percent as an inducement to buy.
Applicability of Guidelines
The rules on gifts to borrowers come into play if you apply for an FHA-backed loan from your bank to buy a home. If the bank puts you in a conventional, or regular, mortgage rather than an FHA-backed one, the rules don't apply. However, conventional bank loans restrict your receiving down payment help, including how much of the home price you must front. Direct Mortgage LLC tells its borrowers it can get down payment help but must still put down a payment of 5 percent.
- United States Department of Housing and Urban Development: The Federal Housing Administration (FHA)
- United States Department of Housing and Urban Development: Program Descriptions: Mortgage Insurance for 1- to 4-Family Homes (Section 203(b))
- Maryland Department of Housing and Community Development: Lender's Compliance Manual for Mortgage-Backed Security Program
- United States Department of Housing and Urban Development: HUD 455.1: Mortgage Credit Analysis for Mortgage Insurance
- United States Department of Housing and Urban Development: Affordable Housing Program Format
- Internal Revenue Service: 2011 Instructions for Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return
- NationsDirect Mortgage, LLC: Conventional Conforming Loan Program Guidelines
- United States Department of Housing and Urban Development: 100 Questions & Answers About Buying a New Home
- United States Department of Housing and Urban Development: "An Examination of Downpayment Gift Programs Administered by Non-Profit Organizations: Final Report"; HUD Contract NO: C-OPC-22550/M000; March 1, 2005
- United States Department of Housing and Urban Development: Buying a Home
- Tennessee Housing Development Agency: Notice: Originating Agents Guide: Revision 54; May 20, 2010
- United States Department of Housing and Urban Development: FHA Homeownership Centers and the FHA Resource Center
- United States Department of Housing and Urban Development: FHA Mortgage Limits
- United States Department of Housing and Urban Development: Affordable Housing
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