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How Down Payment Gifts Work

By Liz Gray, FrontDoor.com | Published: 11/01/2007

Strapped for cash for a down payment? The Federal Housing Authority's 203(b) loan (http://www.hud.gov/offices/hsg/sfh/ins/sfh203b.cfm) is the only loan that allows you to pay for 100 percent of the down payment and closing costs with a gift from a friend, relative, non-profit, or government agency.

Though it is not legal for sellers to provide this money to buyers, people have been taking advantage of a loophole in the FHA rules since the early 1990s. Sellers can register their home with non-profit agencies, such as AmeriDream (http://www.ameridream.org/) and Nehemiah (http://www.nehemiahcorp.org/), and pay a "donation," plus a small fee. The buyer is then given a "gift" in the same amount to use for the down payment or closing costs.

The FHA has never officially condoned the practice, but after three studies indicated that the loans were riskier than those that didn't include down-payment gifts, they adopted a rule that prohibits these gifts. The rule, which went into effect on October 31, says the money can't come from the seller, directly or indirectly, or from "any other person or entity that financially benefits from the transaction."

Both AmeriDream and Nehemiah are suing the FHA to repeal the rule. In the meantime, both companies are allowed to continue giving the "gifts" until March 31.

Bottom line: gifts from friends or relatives are still okay, but make sure it's still legal before you accept an indirect "gift" from a seller.

GO TO: Part 1: Evaluate Your Life and Finances

GO TO: Part 2: Shop for a Loan

GO TO: Part 3: Find a House

GO TO: Part 4: Close the Deal

GO TO: First-Time Homebuyer's Guide

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