Did you know you can buy a home with no down payment out of your pocket?

Conventional and FHA loans allow Gift Funds or Donor Funds to be used for your down payment. (VA gift funds still allow no-down-payment options for Veterans)

Have you thought about this before?

“I’d like to buy a home but don’t have the money for the down payment assistance or closing costs!”

There are a lot of lesser-known alternative sources of funds that are acceptable to FHA.

Here is a list of what FHA allows for FHA Gift Funds:

FHA Gift Funds

• Family, close friends (with no financial interest)
• Employers
• Charitable organizations (with no financial interest)

Loans from Immediate Family

Loans from immediate family can be unsecured or secured loans. Unsecured loans rely solely on the borrower’s creditworthiness to repay the loan. This means that the lender will not seize any assets if the borrower defaults on the loan. Secured loans for bad credit, on the other hand, are backed by collateral, typically the property itself. If the borrower defaults on a secured loan, the lender can seize the collateral to recoup their losses.

When payments on a secured loan from an immediate family are calculated, they are expressed as a ratio of the borrower’s income and debt. This ratio is known as the debt-to-income (DTI) ratio. Lenders use the DTI ratio to assess the borrower’s ability to repay the loan. A lower DTI ratio is generally better, as it indicates that the borrower has a larger income relative to their debts.

Secured Loans

Secured loans are a type of loan that is used to purchase a property. The loan is secured by the property itself, which means that the lender can seize the property if the borrower defaults on the loan. Secured loans can be collateralized by investment accounts or real property. Investment accounts that can be used as collateral for secured loans include stocks, bonds, and mutual funds. Real property that can be used as collateral for secured personal loans for bad credit includes homes, land, and commercial property.

Payments on loans against deposited funds, such as 401(k) accounts, are generally not considered when calculating debt-to-income ratios. This is because these funds are typically not accessible until retirement. For example, if a borrower has a 401(k) loan, the payments on the loan will not be included in their DTI ratio. This is because the borrower is not required to make payments on the loan until they retire or leave their job.

Trade Equity

Open trade equity refers to the use of real property that the borrower already owns, such as a boat, as part of their cash investment towards a new property. This can help the borrower meet the down payment requirements for the new property. For example, if a borrower is looking to purchase a new home, they can use the equity in their boat to help cover the down payment. The equity in a property is the difference between the fair market value of the property and the amount of money that is still owed on the loan.

Sale of Personal Property

Selling personal property like a car, boat, motorcycle, or even items on online platforms like eBay involves a specific process to ensure a smooth and documented transaction.

Before finalizing the sale, it’s crucial to establish a fair market value for the item on FHA gift funds. This protects both the buyer and seller. A common approach is to obtain an independent appraisal from a qualified professional familiar with the specific type of property. For instance, for a car, this could involve a licensed appraiser or a reputable dealership.

Also, having a clear and documented record of the sale is essential. This serves as legal proof of ownership transfer and protects both parties in case of any future disputes. A written bill of sale is a common method, detailing the item’s description, selling price, date of sale, and information for both buyer and seller. For online platforms like eBay, the platform itself often generates a sales record once the transaction is complete.

Bridal Registry Accounts

Bridal registry accounts are a thoughtful way for couples planning a wedding to streamline gift-giving from family and friends.:

Typically, couples open a bridal registry account for FHA gift funds at a department store or online retailer well in advance of the wedding date. This allows guests to browse the registry and select gifts the couple has chosen and deems useful for their new life together.

While most registries focus on physical gifts, many now offer the option for guests to contribute cash directly to the couple. This flexibility allows for greater choice for the couple, potentially enabling them to use the funds for a honeymoon, home improvement project, or even contribute towards a down payment.

Sweat Equity

Sweat equity refers to the value attributed to the labor or materials a borrower contributes towards a property, either before or during construction. This can be a significant factor in obtaining financing or determining the overall value of the property.

Sweat equity can take the form of the borrower doing some or all of the construction work themselves on a new house. For instance, if they build cabinets, lay floors, or paint the walls, the value of that labor contributes to the overall equity they have in the property.

Sweat equity can also involve the borrower supplying some of the building materials for construction or renovation. This could include lumber, roofing materials, or fixtures they purchase themselves, further increasing their financial stake in the property.

Commission from Sale

Purchasing a home can be a significant financial hurdle in FHA gift funds. Receiving a commission from the sale as a gift from a family member who is a licensed real estate agent can be a valuable way to increase your down payment or closing cost funds. However, some important aspects need consideration.

First and foremost, the family member acting as the real estate agent must be properly licensed in your state and entitled to the commission earned from the sale of your property. This ensures the transaction is legitimate and avoids potential issues.

To utilize the commission as part of your down payment or closing costs, it needs to be treated as a formal gift. This typically involves a signed gift letter from the family member explicitly stating that the money is a gift and not a loan. The letter should also detail the amount of the gift and its source (commission from the sale of your property).

While receiving the commission as a gift typically doesn’t have any tax implications for the borrower, consulting with a tax professional is recommended to ensure everything is handled appropriately. There may be tax implications for the family member for multi family loans gifting the commission, depending on the amount.

Rent Credit

If you’re purchasing a home currently occupied by tenants, the rent payments they are making can potentially be considered part of your cash investment towards the property. Here’s how it can work to your advantage.

To qualify for this benefit, the rent payments being made by the current tenants need to be demonstrably above the fair market rent for similar properties in the area. This ensures that the rent isn’t inflated and accurately reflects the actual value of the rental income.

Similar to the commission from sale scenario, proper documentation is crucial. You’ll need a copy of the current lease agreement with the tenants, along with evidence of the fair market rent for comparable properties. This could include rental listings, FHA gift funds appraisals, or market reports from reputable sources.

It’s important to remember that lenders ultimately have the final say on rent credit.  Some lenders may have specific requirements or limitations regarding the use of rental income as part of the down payment.  Discussing this option with your chosen lender upfront ensures they accept rent credit and understand their specific criteria.