You should Not have Any Indemnifications Due To Gift Transactions

Written By: Glenn Michaels

Over the years many FHA lenders have completed FHA deals with a gift incorrectly resulting in an indemnification. For those not familiar with the term “indemnification” it means that the FHA is removing the FHA insurance for a specific mortgage loan. If that loan defaults the lender would have to make good on the loan or have to buy the loan back since the FHA loan has lost their FHA insurance.  The new Single Family Handbook 4000.1 spells out how to underwrite deals with a gift.

We will be discussing a cash gift and gifts from gift of equity. If a lender follos the rules put forth by HUD there is less chance of indemnification.

Gift by definition is a contribution of cash or equity with no expectation of repayment. 

** Need Mortgage Training? CLICK HERE to Download Brochure **

Gift are allowed as long as they come from one or more of the following sources:
•    Borrowers family member
•    Borrowers employer of union
•    A close friend with a defined interest, not a financial interest in the transad
•    A charitable organization
•    A government agency assisting low to moderate low to moderate income families  and first time home buyers.
Files that contain a gift transaction must contain a gift letter. The gift letter must contain the following wording:
•    Donors name, address and telephone number.
•    Donor’s relationship to the borrower.
•    Dollar amount of the gift and a statement that repayment is not required.

Next we must make sure that we have certain documents in the ,loan file. They are as follows:

a.    Gift funds verified in borrowers account, obtain the donor’s bank account showing the withdrawal and evidence of deposit in borrower’s account.
b.    If gift funds not verified in borrower’s account. Obtain the certified check, money order, cashier’s check, wire transfer, or official check and the bank statement with the withdrawal from the donor’s account.
c.    If the gift is being paid at settlement we must verify that the funds received  are funds from the donor in the amount in the gift letter.
d.    If the gift funds are being borrowed by the donor we must have written evidence that the funds were borrowed from an acceptable source and not from a party to the transaction.
A Gift of Equity is allowed  but is must be from a family member that provides a credit as a gift on property being sold to other family members. The same gift letter used with cash donation is used with a Gift of Equity.

If you and your company follow these gift rules your loan file will not be forced to be indemnified for improperly completing the required documentation for a mortgage transaction with a gift.


About The Author

Glenn Michaels - As an NAMP® staff writer, Glenn Michaels is a mortgage underwriting instructor for Mortgage Underwriter University (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. If you're interested in becoming a writer for NAMP®, please email us at:contact@mortgageprocessor.org.


Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.