The Quick Read: A buyer can use gift funds and down payment assistance on an FHA purchase, but only when each dollar has a clean source and a clean paper trail. Family gifts need a signed letter and a traceable transfer. Assistance programs follow their own rules, and the second-lien kinds are real loans. Both are for a primary residence you will live in.
Key Takeaways
- A gift means no repayment, ever. If the donor expects the money back, it is a loan and gets underwritten as one.
- The donor matters. Family is the usual source, but employers, charities, and public programs can qualify. The seller, the agent, and the builder cannot fund your minimum investment.
- Assistance comes in four shapes: a grant, a forgivable second lien, a repayable second lien, and a refinance-cost second lien.
- Nobody has to be a first-time buyer. Repeat buyers qualify.
- Everything here applies to owner-occupied primary residences only.
What Counts as a Gift on an FHA Loan?
A gift is money someone hands you with no repayment obligation. FHA requires a gift letter, signed and dated by both the donor and you. HUD’s FHA guidance on gifts says the letter gives the donor’s name, address, phone number, and relationship to you. It also states the dollar amount and confirms that no repayment is required.
The lender also follows the money. Your file shows where the funds started and where they landed, whether in your account or with the settlement agent. Unexplained cash fails this test. (A gift that appears in your account the week before closing, with no donor statement behind it, is the classic stall.)
FHA underneath all of this asks for a minimum required investment, often shortened to MRI. That is your own skin in the game. Our programs work from 3.5% of the lesser of price or appraised value for a borrower with a representative credit score of 580 or higher. Scores from 500 to 579 need 10%. A properly documented gift can cover that investment, subject to the source rules in HUD’s Handbook 4000.1, the lender-facing FHA rulebook.
The rest of the FHA structure is simple. First-lien leverage runs up to 96.5%. An upfront mortgage insurance premium can be financed into the loan. Annual mortgage insurance is charged by tier. One-unit FHA loan limits for 2026 vary by county.
Who Can Give You the Money?
Family is the simplest donor. FHA also recognizes employers and labor unions, charitable organizations, government agencies with homeownership programs, and close friends with a clearly defined, documented interest in you. Verify your specific donor against the Handbook with your loan officer, because the lender makes the final call.
| Donor | Usually acceptable? | What the lender wants |
|---|---|---|
| Parent or relative | Yes | Gift letter, transfer proof |
| Employer or union | Yes | Gift letter, program paperwork |
| Charity or public program | Yes | Program terms, funding source |
| Close friend | Depends | Documented relationship to you |
| Seller, agent, builder | No | Cannot fund your MRI |
The seller exclusion has a history. A federal audit found that seller-reimbursed “gifts” through nonprofits led to higher default rates and inflated prices. FHA closed that door, and it has stayed closed. A gift that traces back to the seller, even through a middleman, is not a gift.
One related idea: a gift of equity. That is when a family member sells you the home below its value and the difference counts as your contribution. On FHA, it works only between family members, per the same HUD page.
How Do Gift Funds and Assistance Programs Differ?
A gift comes from a person. Down payment assistance comes from a program. Our team arranges FHA, USDA, and HUD-184 purchases through wholesale lenders every week, and these two sources behave differently in a file. A gift adds no payment and no lien. Assistance may add a lien, a payment, or neither, depending on its shape.
FHA itself does not hand out assistance. The money comes from a program layered on top of the FHA first loan. Lendmire’s down payment assistance programs page lays out the options. For the family-money side, Lendmire’s piece Down Payment Assistance vs Gift Funds From Family covers the tradeoffs in more depth.
Public programs exist in many forms. A state housing finance agency, such as the Arkansas Development Finance Authority, runs its own down payment assistance. Many public programs cap assistance or limit it to certain buyers. The options below are the ones we arrange through wholesale lenders, subject to program guidelines and full underwriting.
The Four Shapes of Assistance
Grant. The grant is 2% or 3.5% of the purchase price, applied toward your FHA minimum investment. There is nothing to repay. It is released at closing, with no lien, no payment, and no interest. The credit floor is 620, using the lowest representative score among all borrowers.
The grant pairs with FHA first liens at 96.5% leverage, on 1-4 unit primary residences. An HUD-approved homebuyer education course is required. You pay for it up front, and the cost is credited back at closing. The grant is not offered in Washington. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.
Forgivable second lien. This is 3.5% of the lesser of price or appraised value. It carries no interest and no monthly payment. It is forgiven in full after 36 or 60 on-time first-lien payments, with no 90-day-or-greater delinquency. The credit floor is 640 (660 on a blended score). It pairs with FHA, USDA, or HUD-184 first liens on 1-2 unit homes. No homebuyer counseling is required.
Repayable second lien. This is 3.5% or 5% of the lesser of price or appraised value. At 5%, it covers the 3.5% minimum investment plus 1.5% toward closing costs and prepaid items. This one is a real loan. It is interest-bearing, with a monthly payment, a 30-year amortization, and a balloon due in year 10. It comes with its own loan disclosure and a separate balloon disclosure. The credit floor is 660 (670 blended). High-balance first liens are allowed, but manual underwriting is not.
Refinance-cost second lien. On an FHA 203(b) refinance, this covers 1% to 3.5% of the lesser of the current balance or appraised value toward closing costs. Combined leverage can reach 104%. It is never used on a streamline refinance or to refinance an existing assistance loan. The credit floor is 660 (670 blended).
Who Qualifies for Each One?
Here is the point many buyers miss: no option requires you to be a first-time buyer. Repeat and move-up buyers qualify.
The second-lien options have no income limit beyond USDA’s own limits when the first lien is USDA. The grant is the one with an income test. Household income must be at or below 140% of the area median income, unless a qualifying category applies. Those categories include:
- First responders, current, former, or entering service
- Educators
- Medical personnel
- Civil servants at the federal, state, or local level
- Military personnel, current, retired, or volunteer
- First-time buyers, meaning no ownership interest in residential property in the prior three years
- Buyers purchasing in an underserved census tract
A blended score can help on the second-lien options. A lower-scoring co-borrower’s score is averaged in when the primary wage earner earns at least 60% of household income and holds the higher score. AUS approval is required.
Can You Stack a Gift With Assistance?
This is the question most buyers actually have, and the answer splits in two.
A family gift can sit alongside a second-lien option, because it is your money, documented as your own. The assistance itself cannot be combined with another assistance program. A mortgage credit certificate is not permitted with the second-lien options. The grant also cannot pair with FHA High Balance, FHA $100 Down, FHA 203(h), Good Neighbor Next Door, or One-Time Close.
Picture a buyer with a parent willing to help, buying a one-unit home. She picks the forgivable second at 3.5%. Her parent’s gift covers closing costs and a little extra cushion. The lender documents both: a recorded second lien behind the first, and a gift letter with a transfer trail. Different paperwork, same file.
Two cautions. First, a second lien from a government or nonprofit source cannot put cash in your hands at closing. Second, the lender tests combined loan-to-value, meaning the first loan plus all subordinate liens against the home’s value. The second’s payment, if any, goes into your debt ratios. On USDA files, underwriting enters that payment as a liability in the automated system.
Where the General Rule Breaks
Seller-linked money. If the seller reimburses a “donor,” it is not a gift. Skip it.
A “gift” with strings. If family wants repayment, you have a loan. A family-held second lien may be allowed under FHA’s separate secondary-financing rules, but it is underwritten as debt, not as a gift.
USDA co-signers. A relative cannot co-sign or act as a non-occupant co-borrower on a USDA guaranteed loan. A gift is the permitted way for family to help. USDA also counts income from all adult household members for eligibility, even those not on the note.
USDA reserves. Gift funds do not count toward reserves in the automated underwriting system used for USDA loans. On FHA, reserve treatment depends on underwriting, so do not assume leftover gift money counts.
HUD-184. The Section 184 program itself does not provide assistance or grants, per HUD’s policy handbook. The help comes from a third party such as a tribe or housing entity.
USDA refinances. An assistance second cannot be rolled into a new guaranteed refinance. It must be subordinated or paid off.
Rentals and second homes. Assistance is for owner-occupied primary residences only. That is the whole answer.
What the Lender Looks For
The lender’s checklist is shorter than most buyers fear:
1. An acceptable donor with a documented relationship
2. A signed, dated gift letter with every required element
3. A traceable transfer from the donor to you or the settlement agent
4. No seller or agent link to the money
5. A combined loan-to-value and debt ratio that fit the program
6. For the grant, a completed homebuyer education course
Lenders also flag large, unexplained deposits in your own account. Keep statements for the donor and for yourself. Line the donor up before you make an offer, and ask your loan officer whether the gift should land in your account or go straight to closing.
A Quick Decision Guide
| Your situation | Shape that often fits |
|---|---|
| Thin savings, income at or below 140% of area median | Grant |
| Public-service worker or educator, any income | Grant |
| Want no payment and can stay put 3 to 5 years | Forgivable second |
| Need closing-cost help too | Repayable second at 5% |
| Family can gift part of the cash | Gift plus any option |
| Refinancing an FHA loan | Refinance-cost second |
Programs change, and each file is underwritten individually through wholesale lenders, subject to program guidelines.
Key Terms Defined
Minimum required investment (MRI): the share of the price you must put in yourself on an FHA loan, 3.5% at a 580 score or higher.
Gift letter: a signed, dated statement that money is a gift with no repayment.
Second lien: a loan recorded behind your main mortgage, repaid after the first if the home is sold.
Combined loan-to-value (CLTV): the first loan plus all subordinate liens, divided by the home’s value.
Balloon: a lump-sum payment due at the end of a set term, here in year 10 on the repayable second.
Gift of equity: a family seller discounting the price so the discount counts as your contribution.
Frequently Asked Questions
Can my parents give me the entire FHA down payment?
Usually, yes, if they are acceptable donors and the file is documented. The gift can cover your minimum investment with a signed gift letter and a traceable transfer. The lender makes the final call.
Do I have to be a first-time buyer?
No. None of the assistance options we arrange requires it. The grant, which is 2% or 3.5% of the purchase price with nothing to repay, requires a 620 credit score, an FHA first lien, and homebuyer education. It also has an income test of 140% of area median unless a qualifying category applies. The second-lien options carry no income limit beyond USDA’s on a USDA first lien. Exact terms depend on lender and investor guidelines, credit profile, reserves, and property review.
Does a gift of equity work for any seller?
No. On FHA, only family members can provide equity credit as a gift when the property sells to another family member. A friend or an unrelated seller cannot.
Is the forgivable second lien really a loan?
Yes. It is a recorded lien even though it carries no interest and no monthly payment. It is forgiven only after 36 or 60 on-time first-lien payments, depending on the option. Miss that standard and the balance can stay owed.
Can I use these options on a rental or vacation home?
No. Assistance is for an owner-occupied primary residence only.
If you are buying a primary home and want to see whether a down payment assistance option fits your file, Lendmire can help you compare the grant, forgivable and repayable structures alongside an FHA, USDA or HUD-184 first mortgage.
About Lendmire
Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. Down payment assistance options are arranged alongside FHA, USDA and HUD-184 first liens through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. HUD FHA FAQ: Does HUD allow gifts of equity?
This article is part of Lendmire’s down payment assistance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How To Qualify For Down Payment Assistance As A Repeat Buyer · Open Vs First-time-only Down Payment Assistance For A Move-up Buyer · Can a Six-Figure Earner With Student Loans Get Down Payment Assistance?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.