In order for funds to be considered a gift there must be no expected or implied repayment of the funds to the donor by the borrower.

Note: The portion of the gift not used to meet closing requirements may be counted as reserves.

An outright gift of the cash investment is acceptable if the donor is

• the borrower's relative
• the borrower's employer or labor union
• a charitable organization
• a governmental agency or public entity that has a program providing home ownership assistance to
• low- and moderate-income families
• first-time homebuyers, or
• a close friend with a clearly defined and documented interest in the borrower.

The gift donor may not be a person or entity with an interest in the sale of the property, such as

• the seller
• the real estate agent or broker
• the builder, or
• an associated entity.

Gifts from these sources are considered inducements to purchase, and must be subtracted from the sales price.

Note: This applies to properties where the seller is a government agency selling foreclosed properties, such as the US Department of Veterans Affairs (VA) or Rural Housing Services.

Regardless of when gift funds are made available to a borrower, the lender must be able to determine that the gift funds were not provided by an unacceptable source, and were the donor's own funds.

When the transfer occurs at closing, the lender is responsible for verifying that the closing agent received the funds from the donor for the amount of the gift, and that the funds were from an acceptable source.

Reference: For the requirements regarding the documentation of this transfer at closing, see HUD 4155.1 5.B.5.b.

As a general rule, FHA is not concerned with how a donor obtains gift funds, provided that the funds are not derived in any manner from a party to the sales transaction.

Donors may borrow gift funds from any other acceptable source, provided the mortgage borrowers are not obligors to any note to secure money borrowed to give the gift.

Only family members may provide equity credit as a gift on property being sold to other family members.

The restrictions on gifts previously discussed in this topic and the restriction on equity credit may be waived by the jurisdictional Homeownership Center (HOC), provided that the seller is contributing to or operating an acceptable affordable housing program.

FHA regards the payment of consumer debt by third parties to be an inducement to purchase.

While FHA permits sellers and other parties to make contributions of up to 6 percent of the sales price of a property toward a buyer's actual closing costs and financing concessions, this requirement applies exclusively to the mortgage financing provision.

When someone other than a family member has paid off debts or other expenses on behalf of the borrower

• the funds must be treated as an inducement to purchase, and
• there must be a dollar for dollar reduction to the sales price when calculating the maximum insurable mortgage.

Note: The dollar for dollar reduction to the sales price also applies to gift funds not meeting the requirement

• that the gift be for down payment assistance, and
• that it be provided by an acceptable source.

FHA does not "approve" down payment assistance programs providing gifts administered by charitable organizations, such as nonprofits. FHA also does not allow nonprofit entities to provide gifts to pay off

• installment loans
• credit cards
• collections
• judgments, and
• similar debts.

Lenders must ensure that a gift provided by a charitable organization meets the appropriate FHA requirements, and that the transfer of funds is properly documented.

If a charitable organization makes a gift that is to be used for all, or part, of a borrower's down payment, and the organization providing the gift loses or gives up its Federal tax exempt status, FHA will recognize the gift as an acceptable source of the down payment provided that

• the gift is made to the borrower
• the gift is properly documented, and
• the borrower has entered into a contract of sale (including any amendments to purchase price) on, or before, the date the IRS officially announces that the charitable organization's tax exempt status is terminated.

The lender is responsible for ensuring that an entity is a charitable organization as defined by Section 501(a) of the Internal Revenue Code (IRC) of 1986 pursuant to Section 501(c) (3) of the IRC.

One resource available to lenders for obtaining this information is the Internal Revenue Service (IRS) Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986, which contains a list of organizations eligible to receive tax-deductible charitable contributions.

The IRS has an online version of this list that can help lenders and others conduct a search of these organizations. The online version can be found at http://apps.irs.gov/app/pub78 using the following instructions to obtain the latest update:

• enter search data and click "Search"
• click "Search for Charities" under the "Charities & Non-Profits Topics" heading on the left-hand side of the page
• click "Recent Revocations and Deletions from Cumulative List" under the "Additional Information" heading in the middle of the page, and
• click the name of the organization if the name appears on the list displayed.

In addition, FHA has developed a web page that provides a listing of down payment assistance providers whose nonprofit status has been revoked. This page can be found at http://www.hud.gov/offices/hsg....