How to Fund an FHA Loan Down Payment With Gifts and Seller Credits

The Quick Read: A gift from an eligible donor can cover your entire 3.5% minimum investment. Seller credits cannot. They can only pay closing costs, prepaid items and similar expenses, and anything above those costs gets pushed back against the price. Borrowed money does not count as a gift. The rest of this page covers who can give, how to paper it, and how to combine both tools on one deal.

What Counts as the Down Payment on an FHA Loan?

The down payment is called the minimum required investment. On a purchase, it is 3.5% of the lesser of the price or the appraised value. That pairs with maximum financing of 96.5%. Across the wholesale programs these loans are placed with, that 3.5% applies from a 580 decision score. Every file is subject to lender guidelines and full review.

Two points trip people up.

First, the 3.5% is calculated on the lesser of price or appraisal. If the home appraises below the contract price, the required investment and the maximum loan both follow the lower number.

Second, the down payment is not the same as closing costs. Closing costs are a separate bucket of fees and prepaid items. The Consumer Financial Protection Bureau says closing costs typically run 2% to 5% of the purchase price, not counting the down payment. So you have two cash needs, and different money can pay for each.

That split is the whole game here. Gift money can reach the first bucket. Seller money cannot.

Mortgage insurance is the third item to know. FHA charges an upfront premium of 1.75% of the base loan, and it is typically financed into the loan. It does not add to your cash to close. There is also an annual premium, between 0.15% and 0.75% of the balance depending on term, loan amount and LTV. On a thirty-year loan above 90% LTV, it lasts for the life of the loan. At or below 90%, it ends after eleven years. Gift money does not change any of that.

Gifts vs. Seller Credits at a Glance

Seller, agent and builder money is grouped as “interested party” money for one reason. Those people profit if the deal closes, so FHA treats their dollars differently from a relative’s dollars.

Who Can Give You a Gift?

FHA accepts gifts from a narrow list of donors. In practice, the list reads like this:

• A family member
• Your employer or labor union
• A close friend with a clearly defined, documented interest in you
• A charitable organization
• A government agency or public entity running a homeownership program

The friend category is the hard one. “My buddy wants to help” is not a documented interest. Underwriters want a reason, in writing, that fits a genuine relationship.

The list stops at the deal itself. Sellers, real estate agents, builders and developers cannot be donors. If a seller’s money reaches you wrapped as a “gift” from a relative or a charity, it is still interested-party money and it fails. Nonprofit programs that get reimbursed by the seller fall into the same trap. A true gift has no repayment expected and no strings, spoken or implied.

If you are working out how a gift interacts with a local assistance program, Lendmire’s piece Can Gift Funds and Down Payment Assistance Both Fund an FHA Loan? goes through that pairing.

Many buyers start by asking family. Plenty of them are surprised that FHA loan programs let the gift cover the full minimum investment. Some other loan types set tighter limits on gifts. Check the specific program before you assume.

How Do You Document a Gift Step by Step?

Underwriters care about two things: that the money is truly a gift and that it did not come from an unacceptable source. The paperwork proves both. Here is the sequence that works, in six steps.

1. Confirm the donor qualifies. Check the list above before anyone moves a dollar.

2. Get the gift letter early. HUD’s FHA guidance on gifts lists what the letter must contain. It needs the donor’s name, address and phone number, the donor’s relationship to you, the dollar amount, and a statement that no repayment is required. Both donor and borrower sign and date it. Notarization is not what gives the letter its force, but ask your loan officer whether the lender wants it.

3. Move the money through a trail. The lender must be able to see the funds leave the donor and land with you. Typical evidence is the donor’s withdrawal or check plus your deposit, an electronic transfer record, or a settlement statement showing the donor’s funds arriving.

4. Skip the cash envelope. Cash on hand and cash kept at home are not accepted sources for a gift. Put the funds through an account first.

5. Expect questions about large deposits. Any big deposit that is not payroll gets asked about. Document it before the underwriter asks.

6. Keep the donor’s source clean. A donor may borrow money to give it, but you cannot be obligated to repay the lender of those funds. If you are, it is a loan, not a gift.

A gift lowers the cash you need. It does not change how your income and debts are reviewed. Base ratios start at 31/43 for housing and total debt, and documented compensating factors can stretch them up to 40/50 at the top tier. On most files, the automated underwriting finding is what governs the decision.

Why Can’t a Seller Credit Fund the Down Payment?

HUD’s rule is plain. Interested parties, meaning sellers, agents, builders, developers and lenders, may contribute up to 6% of the sales price. That money can go toward origination fees, other closing costs and prepaid items. HUD also says it may not be used for the borrower’s minimum investment.

Three details matter in practice:

• The 6% is a combined cap. It covers all interested parties together, not each one separately.
• Customary commissions sit outside it. Real estate commissions the seller customarily pays under state or local custom do not count as an interested-party contribution.
• Excess is not cash back. A credit above your actual eligible costs, or above 6%, is treated as an inducement to purchase. The excess is subtracted from the price, dollar for dollar, when the lender computes the adjusted value. The loan percentage then applies to that smaller number.

Here is how that plays out. Say closing costs and prepaids on a purchase come to 3% of the price. The seller agrees to a 5% credit. Only 3% can be used. The other 2% is an inducement, so the value the lender works from drops by about 2% of the price. Your maximum loan drops with it. You do not get the 2% back as cash.

Seller credits also have a price side. Sellers sometimes ask for a higher price when they pay your costs. You then finance that cost through the loan, so the credit is not free money. A credit in place of repairs works the same way. Closing costs go down, but you still pay for the repair later, just through the loan and the monthly budget instead of at the table.

How Do You Use a Gift and a Seller Credit Together?

Think of a buyer using a parent’s gift for the down payment and a seller credit for closing costs. All of this is modeled, in percentages of the price, not a real file.

• Down payment: 3.5% of the price, funded by the parent’s gift. The letter is signed, the money moves through the donor’s account to the buyer’s account, and the statements show it.
• Closing costs and prepaids: 3% of the price, paid by a seller credit written into the purchase contract.
• Buyer’s own cash at the table: close to nothing beyond small items, such as any inspection or appraisal fees paid earlier.

Each tool does its own job. The gift never touches closing costs unless you choose, and the credit never touches the down payment.

Now flip it. Say the buyer’s uncle is the seller, and the “gift” really comes from the sale proceeds he is getting. The gift is now seller money coming back to the buyer. That fails. The fix is to let the buyer take a family gift from a donor who has no stake in the sale. If the uncle really is selling to a relative, the better route is a gift of equity, covered below.

Order of operations helps. Ask your loan officer which donors are acceptable before you negotiate. Then write the credit into the contract as a dollar amount, with room for the lender to apply it only to eligible costs. Finally, check the Closing Disclosure. The CFPB explains that a seller credit shows up as a general contribution or “Seller Paid” line items on page two. A mismatch between the contract and the disclosure is worth catching early.

If the appraisal comes in low, everything shifts. The minimum investment and the maximum loan follow the lower value. Any credit that now exceeds eligible costs becomes an inducement. Build a cushion before you count on a specific number.

Where Does This Go Wrong? (Red Flags and Fixes)

Most of these are paperwork problems that show up on day one of underwriting. The honest practitioner’s view: files rarely fail because gifts are disallowed. They stall because the donor’s money was moved sloppily, or because someone tried to label the seller’s money as the family’s. A clean trail is cheap. Fixing a muddy one is not.

What About Gift of Equity and Assistance Programs?

Gift of equity. HUD allows a gift of equity only from a family member, on a property sold to another family member. It needs a gift letter. In effect, the seller sells below market value and the difference counts toward your investment.

Local down payment assistance. State and local government programs may offer grants or second loans for the down payment or closing costs. Each program has its own terms and its own paperwork on top of FHA’s rules. Some are grants. Some are forgivable. Read the terms before you count them.

Charity programs. A charity that is secretly reimbursed by the seller is not offering a true gift. Treat those with caution and ask your loan officer how the lender views a given program.

Other loan types. FHA is for owner-occupied primary residences, one to four units. A separate FHA product, the reverse mortgage for purchase, has its own interested-party rule, allowing up to six percent of the sales price. Conventional loans work differently.

Key Terms Defined

Minimum required investment: The part of the purchase you must put in yourself or through an allowed gift, set at 3.5% of the lesser of price or appraised value.

Interested party: Anyone who benefits when the sale closes, such as the seller, agent, builder or developer. Their money cannot fund your down payment.

Inducement to purchase: Seller or interested-party money above your actual eligible costs or above the 6% cap. It lowers the value used for the loan.

Adjusted value: The price after any inducement is subtracted. The maximum loan is a percentage of this number.

Gift letter: A signed, dated statement that names the donor, states the amount and says no repayment is expected.

Gift of equity: A family seller selling at a discount to a family buyer, with the discount counting toward the buyer’s investment.

Prepaids: Costs paid ahead at closing, such as the first insurance premium and escrow deposits.

Next Step

If you are buying a home and want to see whether an FHA loan fits your file, Lendmire can help you compare the options and what each one asks of the file. Bring your donor situation and your contract terms, and the conversation can sort which money goes where. Program details are subject to lender guidelines and full file review, and nothing here is a commitment to lend.

For your own numbers, request a scenario review with Lendmire.

About Lendmire

As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. CFPB: Determine your down payment

2. HUD FHA FAQ: Does HUD allow gifts of equity

3. HUD FHA FAQ: What costs can a seller or other interested party pay

4. CFPB: Closing Disclosure explainer

5. Federal Register: HECM for Purchase interested-party notice