FHA Down Payments & Gift Funds: The Uncensored Truth

Every FHA purchase requires a specific cash injection known as the Minimum Required Investment (MRI). This amount is mathematically fixed based on your credit score and the appraised value of the home.

The Calculation

• If your credit score is 580 or higher, your MRI is 3.5% of the Adjusted Value (generally the lesser of the purchase price or appraised value).
• If your credit score is 500 to 579, your MRI jumps to 10%.

Crucial Rule: Closing costs, prepaid property taxes, homeowner's insurance, and discount points do NOT count toward your 3.5% MRI. The MRI must be completely separate from these transactional fees.

FHA guidelines allow you to bring zero dollars of your own money to the closing table. The entire 3.5% MRI and all your closing costs can be covered by a Gift, provided it meets strict verification rules.

Who Can Provide a Gift?

FHA strictly monitors the source of gift funds to ensure it is not a disguised loan or a kickback. Acceptable donors are exclusively limited to:

• A Family Member (parent, child, sibling, aunt, uncle, grandparent, etc.).
• An Employer or Labor Union.
• A close friend with a clearly defined and documented interest in the Borrower.
• A Charitable Organization or government down payment assistance program.

Who CANNOT Provide a Gift?

The donor may never be a person or entity with an interest in the sale of the property. This means you cannot receive gift funds from the Seller, the Real Estate Agent, the Builder, or the Mortgage Lender. (Note: A family member who is selling you their house is exempt from this restriction via a Gift of Equity).

The "Gift Letter" and Tracking the Money

A gift is only valid if we can prove it doesn't need to be paid back. We must obtain a Gift Letter signed by the donor stating the exact dollar amount and legally confirming that no repayment is expected. Furthermore, we must trace the money leaving the donor's bank account and entering either the borrower's bank account or the title company's escrow account.

Interested Party Contributions (IPCs)—commonly referred to as Seller Concessions—are the most powerful negotiation tool you have when buying a home. FHA allows the seller (or other parties profiting from the sale) to legally pay your closing costs.

The 6% Maximum Limit

FHA guidelines allow interested parties to contribute up to a maximum of 6% of the lesser of the property’s sales price or appraised value. This 6% can be used to pay for:

• Origination fees and lender charges.
• Title insurance, appraisal fees, and survey fees.
• Prepaid property taxes and homeowner's insurance (escrow setup).
• Discount points to permanently buy down your interest rate.
• The Upfront Mortgage Insurance Premium (UFMIP).

What Concessions CANNOT Pay For

This is the rule most real estate agents get wrong: Seller concessions can NEVER be used to pay any portion of the Borrower's 3.5% Minimum Required Investment (MRI). The seller can pay your closing costs, but you must still come up with the 3.5% down payment via your own funds or a verified Gift.

If the seller agrees to contribute more than 6% (or if the 6% covers more than the actual cost of closing fees), the excess amount is considered an "Inducement to Purchase" and must result in a dollar-for-dollar reduction of the home's final sales price.