FHA Closing Cost Rules for a Buyer Using Gift Funds

The Quick Read: FHA closing cost rules let a buyer use gift money for the down payment and for closing costs, as long as the donor has no stake in the sale and the money is documented. Seller or other interested-party money works differently: it can pay closing costs but not your required down payment. Across the wholesale programs Lendmire places FHA files with, the two buckets stay separate on every file. The underwriter checks both against the Closing Disclosure.

What Gift Funds Can and Cannot Do on an FHA Purchase

Gift funds are real money from an acceptable donor that you never repay. They can cover your minimum required investment, which is the cash stake FHA wants you to put in. They can also cover closing costs and prepaid items.

On a purchase, the program envelope is straightforward. Maximum financing is 96.5% of the lesser of price or appraised value, so your minimum investment is 3.5%. That applies at a decision score of 580 or higher. Everything is subject to lender guidelines and full file review.

Here is the catch. A gift must be a true gift. If the “donor” expects repayment, it is a loan, and loans on the down payment are a problem. A gift also does not shrink your loan or your monthly payment on its own. Only a larger down payment or a lower price does that.

You can learn more about how these loans work through Lendmire’s FHA loan programs, including the owner-occupancy rule: the home must be your principal residence, one to four units.

Gift Funds vs. Seller Concessions: Two Different Buckets

Lenders and agents say “seller concession.” The official term is “interested party contribution.” Same idea: money from someone with a stake in the sale, such as the seller, the agent, or a builder.

The 6% limit is the program figure on the files we arrange. Anything above the limit, or above the actual costs it is paying, is treated as an inducement to purchase. The excess typically reduces the price the lender uses to size your loan, dollar for dollar. That can leave you needing more cash than you planned.

One related point: real estate commissions the seller customarily pays are generally not counted against that limit. Confirm the treatment of any specific item with your lender.

Gifts and seller credits can sit on the same deal. Picture a buyer using a parent’s gift for the 3.5% down payment while the seller pays part of the closing costs. The gift handles the down payment and anything left over. The seller credit handles only eligible closing costs, up to the limit. Neither replaces the other. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.

Who Can Give You a Gift

The donor has to be acceptable and have no interest in the sale. HUD’s FHA FAQ lists relatives, and the complete donor list lives in HUD’s lender handbook. Check it there rather than assuming a friend, coworker, or neighbor qualifies.

A few practical notes from the file side:

• Family is the cleanest path. Parents, grandparents, siblings, and similar relatives are the donors we see most often.
• Employers, nonprofits, and government agencies can sometimes provide assistance. Expect the lender to ask for evidence from the agency of the amount and that no repayment is required.
• A close friend is the hard case. The lender will want the relationship clearly documented, and acceptance depends on the lender and the underwriter.
• Your seller, agent, or builder cannot be the donor. Money that looks like a gift but traces back to one of them is treated as interested-party money, which cannot fund your down payment.

The Gift Letter: What It Must Say

A gift letter is a signed statement that the money is a gift. Per HUD’s FHA FAQ on gifts of equity, the letter must be signed and dated by both the donor and the borrower. It also needs:

1. The donor’s name, address, and phone number.

2. The donor’s relationship to you.

3. The dollar amount of the gift.

4. A statement that no repayment is required.

Each element has a job. The relationship tells the lender the donor is acceptable. The amount lets the underwriter tie the letter to the deposit. The no-repayment line separates a gift from a loan.

A letter alone does not finish the job. The lender also has to document the transfer. HUD’s own handbook lives on HUD’s Handbook 4000.1 portal, and HUD updates it from time to time, including a revision to the gift documentation sections. Check the current handbook rather than relying on an older summary, including this one.

The Paper Trail, Step by Step

What the lender needs depends on timing. Here is how it plays out.

Gift already in your account. The lender wants to see the money leave the donor and arrive in your account. Expect to provide documents that show both sides. Some lenders accept alternatives to a donor bank statement, such as a canceled check plus proof of deposit, so ask what your lender accepts.

Gift not yet deposited. The money goes to you or to the settlement agent by an official method, such as a cashier’s check or wire. The lender also wants evidence the donor had the funds.

Gift sent straight to closing. HUD’s older archived guide, the HOC reference guide on gift funds, describes the lender putting documentation instructions in the closing agent’s escrow instructions and collecting proof afterward. That guide is archived, so treat it as background. Your lender follows the current handbook.

Earnest money. If a donor funds your earnest money deposit, tell your loan officer on day one. A gifted deposit still needs the same paper trail. A mystery deposit with no source is what creates delays.

How Gifts Show Up on Your Loan Estimate and Closing Disclosure

You will see gifts on your disclosure paperwork, but not as seller credits. Seller credits get their own labeled line. A family gift at closing shows as a separate credit with a description of the funds. The CFPB’s Regulation Z commentary treats it that way.

Why does this matter to you? The underwriter’s cash-to-close figure has to tie out to your Closing Disclosure. If the gift amount in the letter, the deposit, and the disclosure do not match, the file stalls until someone explains the gap.

Where the General Rule Breaks

The rules above cover the standard case. These edge cases change the answer.

Gift of equity. This is a price discount, not cash. HUD’s FAQ says only family members may provide a gift of equity on a sale to another family member. It is documented with the same kind of letter. Disclosure practice varies, so ask your lender how it will appear.

Gift money that really came from the seller, agent, or builder. It is treated as interested-party money. It cannot fund your down payment, and any excess reduces the price used for your loan.

Down payment assistance. Assistance from a nonprofit or government agency follows similar documentation logic: evidence of the amount and that no repayment is required. Programs differ, so confirm the details with your lender.

Borrowed down payment funds. Money from an unsecured loan or a cash advance is not a gift. Do not count on it as down payment money.

Leftover gift money as reserves. Reserves are the savings you hold after closing. Whether leftover gift money counts depends on the underwriting and the lender. Do not plan around it.

Gift larger than needed. If a donor sends more than the letter says, the extra money creates a mismatch. Keep the letter amount, the deposit, and the Closing Disclosure aligned. If the amount changes, get a revised letter.

Other programs. These rules are FHA-specific. Conventional and VA loans have their own rules, so do not carry the numbers across.

Mistakes That Stall a Gift-Funded Closing

A Pre-Closing Checklist You Can Hand to Your Donor

• Confirm with your loan officer that the donor is acceptable.
• Sign and date the gift letter with every required element.
• Agree on the exact amount and keep it consistent.
• Decide whether the gift goes into your account first or to the settlement agent.
• Keep transfer records: the withdrawal, the check or wire, and the deposit.
• Do not let the donor use funds from the seller, agent, or builder.
• Tell your loan officer about any change before it happens.

Can Closing Costs Be Rolled Into the Loan?

Part of your cost is. The upfront mortgage insurance premium is 1.75% of the base loan, and it can be financed. The annual premium runs between 0.15% and 0.75% of the balance, depending on term, loan amount, and LTV. On a thirty-year loan above 90% LTV, the annual premium lasts for the term. At or below 90%, it ends after eleven years.

Other closing costs generally are not rolled in on a purchase. That is where gifts and interested-party money do their work. For a closer look at the financing side, see Lendmire’s piece Can a Buyer on Gift Funds Finance Closing Costs in an FHA Loan?.

Three Gift Scenarios in Practice

Think of three sketches, described in percentages and plain words.

Gift only. A buyer uses a parent’s gift for the 3.5% down payment and the closing costs. The gift letter, the deposit, and the Closing Disclosure all show the same amount. Clean file. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.

Gift plus seller credit. The gift covers the down payment. The seller’s contribution, within the 6% limit, pays eligible closing costs. The buyer brings little from savings. The underwriter checks that the seller money never touched the down payment.

Gift larger than needed. A donor sends extra to give the buyer a cushion. The file now has a mismatch to explain, and the extra may not count as reserves. A revised letter and a conversation with the loan officer fix it.

County loan limits apply to every FHA purchase, so the price of the home you are targeting matters too. Ask your lender where your county sits.

Key Terms Defined

Gift letter: A signed statement from the donor and borrower that the money is a gift with no repayment.

Minimum required investment: The cash stake FHA requires from the borrower, which is the down payment. On the programs described here it is 3.5% at a decision score of 580 or higher.

Interested party contribution: Money from someone with a stake in the sale, such as the seller, agent, or builder. The consumer term is “seller concession”.

Inducement to purchase: Contributions above the actual costs or above the 6% limit. The excess reduces the price used to size the loan.

Gift of equity: A discount on the sale price from a family-member seller, treated as a price break rather than cash.

Reserves: Savings left after closing. Gift money’s treatment as reserves depends on the lender.

If you are buying a home and want to see whether an FHA loan fits your situation, Lendmire can help you compare the options and what each one asks of the file. Every program figure here is 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

Lendmire (NMLS# 2371349) is a mortgage brokerage serving homeowners and home buyers in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. HUD FHA FAQ: gifts of equity

2. HUD Handbook 4000.1 portal

3. HUD Archives HOC Reference Guide: Gift Funds

4. CFPB Regulation Z commentary on the Closing Disclosure