The Quick Read: A gift and down payment assistance can often share the job of covering your down payment, but a lender sorts each dollar by its legal form. A gift is money you never repay. A grant is assistance with nothing to repay. A second lien, even a forgivable one, is a loan. Which of those counts as “your own money” depends on the first mortgage underneath, and the three government-backed options (FHA, USDA and HUD-184) answer differently.
Key Takeaways
- FHA does not set a separate own-funds minimum. It requires a 3.5% minimum investment and cares about where that money comes from and what form it takes.
- USDA treats a gift as your own funds and treats assistance as not your own funds.
- A “forgivable” second lien is still a lien in underwriting. It is not a gift.
- Money from the seller, agent or builder is not a gift on any of these programs.
- Document the gift first, then disclose the assistance. The file has to show every dollar’s source.
What “Own Funds” Means Here
Banks and insurers use “own funds” for regulatory capital. This article is about something else: the part of your down payment that is yours, as opposed to borrowed or supplied by an outside party.
Lenders care because they want you to have a real stake in the home. But the rule is not one number. It changes with the first mortgage, and the same dollar can be classified differently from one program to the next.
If you are a renter buying a first home, a repeat buyer moving up, or a public-service worker with thin savings, you have probably seen down payment assistance programs advertised next to gift-fund rules. Many buyers assume the two are the same thing. They are not, and the difference shows up in underwriting.
One scope note. Assistance is for an owner-occupied primary residence only. It is not available on a second home or a rental.
How Each First Mortgage Treats Your Money
The first mortgage sets the rules. Here is the short version.
| Factor | FHA | USDA | HUD-184 |
|---|---|---|---|
| Required stake | 3.5% minimum investment | No down payment required | Minimum investment applies |
| Gift | Allowed, with a gift letter | Counts as your own funds | Allowed as a source |
| Assistance | Counts toward the stake if properly sourced | Not your own funds | Comes from outside the program |
| Second lien | Counted in combined leverage | Counted in housing ratio | Counted in ratios |
On FHA, the 3.5% minimum investment is set out in HUD Mortgagee Letter 2019-06, which also explains what lenders must document when a government entity supplies those funds. The base is 3.5% of the lesser of price or appraised value, and FHA’s other layers (a 1.75% upfront mortgage insurance premium that can be financed into the loan, plus annual mortgage insurance) sit on top of it.
On USDA, there is no down payment requirement. That is why the own-funds label matters there in a different way. It decides eligibility, not the size of your stake. More on that below.
On HUD-184, the guarantee program itself does not hand out assistance. Any help comes from a separate provider, and the first-lien position has to be confirmed with the lender.
Sorting Every Dollar: The Source Table
Underwriters sort funds into buckets before anything else. This is the classification the file will go through.
| Source | Own funds? | Underwriting treatment |
|---|---|---|
| Your savings | Yes | Verified in your accounts |
| Family gift | Gift (USDA: own funds) | Needs letter and paper trail |
| Grant, nothing to repay | Neither | Released at closing, no lien |
| Forgivable second | Neither | A lien, counted in the file |
| Repayable second | Neither | A lien with a monthly payment |
| Seller, agent, builder | Not a gift | Treated as a price reduction |
Notice the “neither” rows. Assistance is not savings and it is not a gift. It is its own category, and the file has to say which one it is.
How a Gift Works Inside the Rule
A gift is money you never repay. The gift letter must be signed and dated by both donor and borrower. It must name the donor, give their address and phone number, state the relationship, state the amount and say no repayment is required.
Then comes the paper trail. Lenders typically want to see the money leave the donor’s account and arrive in yours, or reach the closing agent. If the gift arrives at closing, the lender verifies that the closing agent received it from an acceptable source. Cash stuffed in an envelope is a problem. Confirm the exact documentation against FHA’s current handbook.
A few edge points matter here:
- Interested parties. A seller, agent or builder cannot “gift” you the down payment. That money is treated as an inducement and reduces the sales price.
- Gifts of equity. FHA limits these to family members. USDA says the credit must reduce the price with no cash back.
- Excess gift funds. On USDA, extra gift money can be returned to you at closing. Assistance cannot work that way.
- A salary advance does not count as assets to close on FHA.
How Assistance Works Inside the Rule
The assistance options Lendmire arranges through wholesale lenders come in four shapes, and each one sorts differently in the table above:
- Grant-style: 2% or 3.5% of the purchase price toward the FHA minimum investment. Nothing to repay, no lien, no payment. Credit floor of 620. It requires a homebuyer education course and an income test (household income at or below 140% of area median income) unless a qualifying category applies. Those categories include first responders, educators, medical workers, civil servants, military personnel, first-time buyers and underserved census tracts. It pairs with FHA first liens only, and it is not offered in Washington.
- Forgivable second: 3.5% of the lesser of price or appraised value. No interest, no monthly payment, fully forgiven after 36 or 60 on-time first-lien payments. Credit floor of 640.
- Repayable second: 3.5% or 5% of the lesser of price or value. At 5%, the extra 1.5% goes toward closing costs and prepaid items. It is a real loan with a monthly payment, a 30-year amortization and a balloon due in year 10. Credit floor of 660.
- Refinance-cost second: 1% to 3.5% of the balance on an FHA refinance, with combined leverage up to 104%. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
Nobody has to be a first-time buyer. Repeat buyers qualify. The second-lien options carry no income limit beyond USDA’s own limits when the first lien is USDA. Everything is subject to program guidelines and full underwriting, and nothing stacks with another assistance program.
The grant pairs with FHA. The forgivable and repayable seconds also pair with USDA and HUD-184.
The Forgivable Second Is Still a Lien
This is the point that surprises people. Secondary financing is not a gift, even when it is “soft” or “silent” (no monthly payment) or carries forgiveness features.
So the forgivable second adds to your combined balance on day one. The forgiveness happens later, after on-time payments. The underwriter counts it as debt until then. A repayable second goes further: its monthly payment is added to your housing expense.
On USDA, subordinate liens sit in the housing-expense ratio, and compensating factors can allow exceptions. Exact ratios change, so confirm the current figures with your lender.
Combining a Gift and Assistance: The Order of Operations
Here is the sequence that keeps a file clean.
1. Pick the first mortgage. FHA, USDA or HUD-184. This sets your required stake.
2. Choose the assistance shape that fits you. Check credit floor, units and property type.
3. Sort each dollar by type. Savings, gift, grant or lien.
4. Document the gift. Letter, donor statements, proof of transfer.
5. Disclose the assistance. Commitment, note and lien terms go in the file. FHA’s underwriting form asks the lender to report the source type of both gifts and secondary financing.
6. Underwrite the combination. Payments and combined leverage have to fit the ratios.
7. Close. The closing agent receives the funds, and any second lien is recorded behind the first.
What goes wrong when the order is reversed? Usually the assistance gets disclosed late, and the gift is already sitting in an account with no trail behind it. The lender then has to re-characterize money. Gifts that cannot be sourced are a common reason these files stall.
Three Scenarios, in Percentages
These are modeled examples, not offers. No dollar figures, because assistance is always a percentage of price or value.
Scenario one: the stake is covered. A buyer uses an FHA first lien and the grant option at 2% of price. A family gift covers the remaining 1.5% of the 3.5% minimum investment. The gift letter and transfer trail are clean. Own savings pay small costs. This clears, subject to underwriting.
Scenario two: it falls short. A buyer takes the repayable second at 3.5%, expecting it to cover closing costs. It does not. Only the 5% version adds the 1.5% toward closing costs and prepaids. The buyer now needs a gift or savings for the gap. Because the second adds a monthly payment, the ratios also tighten.
Scenario three: USDA first lien. There is no minimum down payment, so the question is eligibility. A large gift counts as the buyer’s own resources and can affect USDA’s test of whether you could obtain conventional financing. The forgivable second does not count as own funds. Same gift, same second, different treatment than on FHA.
The takeaway: the structure matters more than the headline percentage.
Where the General Rule Breaks
- Same assistance, different classification. HUD-184 files can treat money that is not repayable while you live in the home differently than FHA does. Confirm with the lender.
- Government providers. On FHA, a governmental entity or approved nonprofit supplying minimum-investment money triggers extra documentation, per the mortgagee letter above. Charity-run programs are not “approved” by FHA. Lenders verify them.
- Lender-funded help. A lender generally cannot fund the assistance itself on FHA, which is why the money comes through separate providers.
- Lien limits. Older HUD guidance capped total liens against the cost to acquire. Confirm the current rule.
- Federal Home Loan Bank grants. FHA does not treat the FHLB set-aside grant as secondary financing.
Key Terms Defined
Own funds: The part of your down payment that is your money, not borrowed or supplied by an interested party.
Minimum required investment: The smallest stake FHA wants from the borrower, 3.5% of the lesser of price or appraised value.
Gift letter: A signed statement from the donor that the money is a gift with nothing to repay.
Secondary financing: Any loan other than the first mortgage that creates a lien on the home.
Combined loan-to-value: The first mortgage plus all second liens, divided by the home’s value.
Interested party: A seller, agent, builder or anyone with a stake in the sale.
Questions to Ask Before You Commit
- Does this first mortgage count assistance toward my minimum investment?
- Is this assistance a grant or a lien, and how will the file label it?
- Can my donor’s gift cover the gap, and what proof of transfer do you need?
- How will the second lien affect my monthly ratios and combined leverage?
- Does a balloon or forgiveness schedule affect my plan to sell or refinance?
Next Step
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, through wholesale lenders and subject to program guidelines. This is not a commitment to lend.
Frequently Asked Questions
Does down payment assistance count as my own funds?
Not on USDA, where assistance is excluded from your own funds while gifts count. On FHA, assistance can count toward the 3.5% minimum investment when it comes from an acceptable source, but it is still labeled as assistance in the file, not as savings.
Can a gift cover the whole minimum investment?
Often yes on FHA, since the gift letter and transfer trail are met. There is no separate own-funds floor beyond the 3.5% investment itself. Other rules, such as multi-donor documentation, still apply, so confirm with your lender.
Can I use a gift together with the grant or a second lien?
Generally yes, because a family gift is not another assistance program. Nothing stacks with a second assistance program. The gift usually covers what the assistance leaves open, and the lender confirms the total against your first-lien program.
Is a forgivable second the same as a gift?
No. It is a lien. Secondary financing is not a gift even when forgiveness is built in. Forgiveness comes after 36 or 60 on-time first-lien payments.
Do I have to be a first-time buyer?
No. Repeat and move-up buyers qualify. The first-time definition is only one of the grant’s qualifying categories, and the second-lien options carry no first-time requirement.
Investors who want the broader program framework can review how DSCR loans work.
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. USDA
2. HUD Mortgagee Letter 2019-06
This article is part of Lendmire’s First Time Home Buyer series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: Can A Repeat Buyer Get Down Payment Assistance On A Primary Home? · Does Down Payment Assistance Have an Income Limit? · Smart Ways to Start Saving for a Down Payment
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.