One of the more underappreciated features of an FHA loan is that the down payment doesn't have to come from the borrower's own savings. FHA gift funds — money given by a family member, employer, or other eligible source — can cover the entire minimum down payment and closing costs. That's a meaningful advantage for buyers who have the income to afford a mortgage but haven't yet built up a large savings cushion.

That said, "gift funds are allowed" is about the extent of what most articles explain. In practice, the process has specific requirements that, if handled carelessly, can stall or derail a closing. The gift letter is the easy part. It's the documentation trail between the donor's account and the borrower's account where we see things go sideways — often in the final days before closing.

This article breaks down how FHA gift funds actually work: who can give them, who can't and why, what documentation lenders need, and where borrowers commonly run into trouble.

How Much of Your FHA Down Payment Can Be a Gift?

The entire minimum down payment can come from gifted funds. Per HUD's Single Family Housing Policy Handbook (HUD 4000.1), borrowers with a credit score of 580 or higher are eligible for a minimum down payment of 3.5% of the purchase price — and that full 3.5% can come from gift money with no requirement that the borrower contribute any of their own funds.

Gift funds can also be applied to closing costs, which typically range from 2% to 5% of the loan amount. [STAT NEEDED — suggest verifying current closing cost averages with CFPB's Owning a Home resource or a 2024 Freddie Mac report for accurate figures.] So if you're buying a $350,000 home, the $12,250 down payment could come entirely from a gift, along with any eligible closing cost contributions.

There's one meaningful restriction worth knowing early: gift funds are only permitted on FHA loans for primary residences. If you're purchasing a second home or investment property, gift funds are off the table regardless of the source. If that changes what you're considering, it may be worth looking at the full range of mortgage loan programs available to you.

One thing borrowers sometimes overlook: the size of your down payment — whether it comes from gifts or your own savings — affects your monthly mortgage insurance premium (MIP). A larger down payment reduces your loan balance and, depending on the loan term and down payment percentage, may affect how long you pay MIP. If you want to see how different down payment amounts change your monthly payment, the numbers are worth running before you finalize your approach.

Who Is Allowed to Give FHA Gift Funds?

FHA doesn't allow gifts from just anyone — the donor must fall into a defined category of acceptable sources. According to HUD's Single Family Housing Policy Handbook (HUD 4000.1), acceptable gift donors include family members, employers, labor unions, close friends with a documented relationship, and government agencies or charitable organizations approved by HUD.

"Family member" under FHA guidelines is broadly defined. It includes parents, stepparents, siblings, children, aunts, uncles, cousins, in-laws, and domestic partners. The relationship doesn't have to be a first-degree relative.

The "close friend" category requires a bit more attention. The relationship needs to be documented — lenders will typically ask for something that establishes the connection, such as a letter or records showing an existing personal relationship. A gift from someone the borrower met recently is harder to support. [STAT NEEDED — suggest checking HUD's Annual Report to Congress on the FHA Mutual Mortgage Insurance Fund for data on gift fund usage rates among FHA borrowers.]

If you're exploring all available sources and programs for your down payment, the full breakdown of down payment options covers what's available beyond gift funds as well.

Who Cannot Give Gift Funds — And Why the Rule Exists

The prohibition on "interested parties" — sellers, real estate agents, builders, and anyone else who financially benefits from the transaction closing — isn't arbitrary. The concern is that allowing these parties to contribute to the down payment creates an incentive to inflate the purchase price. If a seller agrees to "gift" $15,000 toward the buyer's down payment, they can simply raise the listing price by $15,000 to recover it. The buyer ends up with a larger loan on an overvalued property, and FHA's insurance fund absorbs the risk if the loan defaults.

This matters practically because we occasionally see borrowers try to structure around this rule — for example, asking a builder to adjust closing credits in a way that effectively functions as down payment assistance. Lenders are trained to flag these arrangements. If funds can be traced back to an interested party, even indirectly, the loan won't clear underwriting.

The other thing worth knowing: if gift funds are discovered to have come from an ineligible source after closing, the loan could be considered misrepresented, which carries serious legal consequences. The rule isn't a technicality — it protects the integrity of the transaction.

What FHA Actually Requires to Document Gift Funds

This is where most problems occur, and it's worth being specific. Per HUD Handbook 4000.1, lenders are required to verify that gift funds have been transferred to the borrower and that no repayment agreement exists before the loan can close. Two things are needed to satisfy that requirement: a signed gift letter and documented proof of the actual transfer.

The Gift Letter

The gift letter must include the donor's full name, address, and phone number; the donor's relationship to the borrower; the exact dollar amount of the gift; the address of the property being purchased; and a clear statement that no repayment is required or expected. Every item on that list matters — an incomplete gift letter will come back for corrections, which takes time.

The "no repayment" language is non-negotiable. If there's any expectation — even an informal, unwritten one — that the borrower will pay the money back eventually, the gift is legally a loan. Representing it otherwise on a mortgage application is a form of fraud. We've had conversations with borrowers who thought a quiet handshake agreement wouldn't matter. It does.

Proof of Transfer — The Part That Actually Stalls Loans

A signed gift letter alone isn't enough. The lender needs to trace the money from the donor's account to the borrower's account. This typically requires a bank statement from the donor showing the funds were available (establishing the donor's capacity to give), along with evidence of the transfer itself — a wire transfer record, a copy of a certified check, or both the donor's withdrawal receipt and the borrower's deposit record.

One important clarification that trips up a lot of buyers: FHA does not require gift funds to be "seasoned" — meaning they don't have to sit in the borrower's account for 60 days before use. That's a convention more associated with conventional loans. What FHA does require is that the transfer be documented before closing, regardless of timing. The distinction matters because it means a gift received shortly before closing is fine, provided the paper trail is clean and complete.

The place things go wrong most often is cash. If a donor hands the borrower $10,000 in cash, and the borrower deposits it into their checking account, that deposit shows up as an unexplained large deposit. Lenders are required to source any significant deposit that isn't clearly explained. A cash gift is nearly impossible to document in a way that satisfies FHA's tracing requirements — there's no withdrawal record from the donor's account, no wire confirmation, no check. In our experience working with borrowers in Colorado and Florida, cash gift situations frequently require additional explanation letters, and sometimes the funds simply can't be used for the transaction. The straightforward guidance: wire transfers and certified checks create clean paper trails. Cash doesn't.

For more guidance on how HUD structures FHA loan requirements, the HUD Federal Housing Administration page provides access to policy handbooks and current program information. For broader context on what affects your down payment amount, the CFPB's down payment resource is worth reading alongside FHA-specific guidance.

If you're working with a lender who is licensed in Colorado or Florida, they should be walking you through the documentation process well before closing. If you're not sure what to expect from a lender, our Colorado mortgage team reviews gift fund situations as part of the initial loan consultation — not as an afterthought once you're under contract.

Frequently Asked Questions About FHA Gift Funds