The 203K loan, like a standard FHA loan, requires a down payment of 3.5% on the purchase of a home. That 3.5%, luckily can come from a variety of sources, including a gift. The FHA is very particular about who can provide the gift and who cannot provide it, though. If you do not have the money to put down on your home that you wish to rehab, you can accept a gift as long as it meets the following requirements.
The Largest Requirement
The largest requirement for a down payment gift for the 203K loan is the fact that the money is not required to be repaid. This means any collateralized or non-collateralized loans. This could look like a variety of things including:
- Money given to the borrower from a family member or employer with the expectation that the money be paid back in the future
- Money obtained from a credit card cash advance or a payday loan, each of which gets paid back with heavy interest and penalties
If an approved person gives you money for the down payment, it has to be without any strings attached.
Who can Give you Money?
Aside from the terms of the gift, are the requirements regarding who can give you money for the down payment on your 203K loan. The FHA is fairly lenient with this requirement allowing any of the following people to provide you with the funds necessary to purchase a home:
- Your employer
- The labor union you belong to
- A close friend that can document the relationship with you
- Government grants
In addition to who can provide you with money for the down payment is the list of people that cannot provide you with money. The people that make this list are anyone that has an interest in the property as the gift could be considered a way to induce you to purchase the property, which is a violation of the FHA loan policy. These people including the sellers of the home, any real estate agents involved in the transaction, and the builder, but the list can extend to include any other interested parties that the lender thinks has an arms’ length relationship.
Proving the Gift
If you have someone that will provide you with a down payment gift for your 203K loan, you will need a written gift letter from this person. The gift letter needs to document some very important information including:
- The donor’s identifying information and relationship to you
- The amount of money being gifted
- The date of the gift
- The address of the property that the gift is intended for use on
- A signed statement stating that this is a gift and no repayment terms exist
The largest requirement surrounding how to prove gift money for a 203K loan is sourcing the funds. Just as the lender would have to determine where your own funds came from, such as your employment or investments, they have to do the same for a gift. If the donor has adequate proof that the funds were either in his bank account for a period of 6 months or longer or can prove that the funds came from his own employment, no further verification is required. If, however, the funds are not seasoned (in the bank account for at least 6 months), the lender will need proof of where they came from to ensure that there is not some type of loan somewhere down the path that requires their borrower to repay it somehow.
Although any borrower can accept the entire 3.5% down payment as a gift, there is an exception to the rule. If your credit score is below 620, but higher than 580, you are required to put down your own 3.5% down payment. You can accept gift funds to help you pay for closing costs and the upfront mortgage insurance that the FHA requires, but your own investment of at least 3.5% is necessary in order to ensure that you have skin in the game. With a lower credit score, you pose a higher risk to the lender when it comes to defaulting on the loan. If you have money invested in the home, however, you provide the lender with a compensating factor, lowering the risk of default.
Overall, it is rather easy to accept a gift for the down payment on a 203K loan. As long as you have the acceptable proof and the lender can source the funds, you can accept the gift. This makes it even easier to get into a home that needs fixing up without breaking your pocketbook!