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FHA's gift rules are the reason so many first-time buyers close without years of saving: 100% of the 3.5% minimum required investment can be gifted, and gifts can also cover closing costs, prepaids, and reserves.
Acceptable donors
HUD Handbook 4000.1 permits gifts from:
- A family member — broadly defined, including a spouse or domestic partner, child, parent, grandparent, sibling, aunt, uncle, and relationships by marriage, adoption, or legal guardianship
- The borrower's employer or labor union
- A close friend with a clearly defined and documented interest in the borrower
- A charitable organization
- A governmental agency or public entity operating a homeownership assistance program for low- and moderate-income families or first-time buyers — this is how down payment assistance programs work
Prohibited donors
Anyone with an interest in the transaction cannot be the source: the seller, the real estate agent or broker, the builder, or an associated entity — including any third party funded by them. This prohibition is absolute; a seller who "gifts" the down payment through an intermediary invalidates the loan.
Sellers can still help through the separate interested-party contribution allowance: up to 6% of the sales price toward closing costs, prepaids, and discount points — but never toward the down payment.
The gift letter
Every gift requires a letter, signed by the donor, containing:
- The donor's name, address, and phone number
- The donor's relationship to the borrower
- The dollar amount of the gift
- An explicit statement that no repayment is expected
The paper trail — where files fail
Underwriting must be able to trace the money from the donor's account into the transaction. Documentation depends on how the gift is delivered:
- Gift transferred before closing: the donor's withdrawal document or canceled check, plus the borrower's deposit slip or bank statement showing the deposit
- Gift wired to the closing agent: a copy of the wire confirmation showing the transfer from the donor's account
- Gift delivered at closing: a copy of the certified check or cashier's check and the donor's withdrawal document
Two rules break more files than anything else:
- Cash on hand is not acceptable. Money that cannot be sourced to a documented account is not usable. Deposit cash into an account and season it well before you apply.
- The donor's bank statement may be required. If the donor's own funds show a large recent unsourced deposit, underwriting can ask the donor to source *that* too. Plan gifts at least 60 days ahead when possible.
Gifts of equity
When a family member sells you their home below market value, the difference can serve as a gift of equity and satisfy the down payment. It requires the same gift letter, must appear on the closing disclosure, and the appraisal must support the market value used. This is an identity-of-interest transaction — for a family sale of a principal residence, FHA's 85% LTV identity-of-interest restriction does not apply, so 96.5% financing remains available.
How much you actually need
On a $400,000 purchase, the 3.5% minimum investment is $14,000 — all of which can be gifted, with closing costs covered by a combination of gift funds and up to 6% in seller credits. Run your own numbers with the closing cost estimator and the payment calculator.
Acceptable and unacceptable donors
| Donor | Allowed? |
|---|---|
| Parent, grandparent, sibling, child, spouse | Yes |
| Documented close friend with a clearly defined interest | Yes |
| Employer or labor union | Yes |
| Charitable organization | Yes |
| Government or public DPA agency | Yes |
| Seller, builder, developer, or their affiliates | No |
| Real estate agent on the transaction | No |
| Anyone expecting repayment | No — that is a loan |
Worked example: a $400,000 purchase funded by gift
- Minimum required investment at 3.5%: $14,000 — fully giftable
- Estimated closing costs and prepaids: $11,000
- Seller credit negotiated (FHA allows up to 6% in interested-party contributions): $9,000
- Remaining cash need: $2,000, also giftable
- Net out of pocket for the buyer: potentially $0, with the earnest money reimbursed at closing
Compare that path against the FHA DPA second lien, which achieves a similar cash-to-close outcome without involving family money.
Paper-trail rules that trip people up
- Never deposit cash. Bills in an envelope cannot be sourced and will be excluded from your assets.
- Do not combine the gift with your paycheck deposit — one clean transaction per gift.
- If the donor's own funds arrived recently from another account, be ready to document that transfer too.
- Match the gift letter amount exactly to the wire amount; a $50 difference generates a condition.
- Gifts received before application still need documentation if they are in your statements.
Gift funds vs. down payment assistance
| Family gift | FHA DPA second lien | |
|---|---|---|
| Repayment | None | Repayable second lien |
| Documentation burden | Gift letter plus donor statements | Program forms handled by the lender |
| Availability | Depends on family resources | Available to eligible borrowers from 580 FICO |
| Effect on monthly payment | None | Adds a second-lien payment |
A short checklist for the donor
- Sign the gift letter before moving money
- Wire from the donor's own account, not a third party's
- Send a statement showing the funds existed before the transfer
- Keep the wire confirmation
- Expect nothing back — an expectation of repayment invalidates the gift