Written By: Glenn Michaels, Op-Ed Writer
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.
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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 op-ed writer, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter (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.