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Can a gift of equity be used to pay off debt on an FHA purchase
Can a gift of equity be used to pay off debt on an FHA purchase
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1 Reply
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Yes, a gift of equity can be used in an FHA purchase; however, this is meant to cover most of the down payment and closing costs. Some limitations exist when using a gift of equity to pay off debt as part of the transaction.
Things to Consider:
HUD Agency Mortgage Guidelines on FHA Loans:
Down Payment and Closing Costs: According to FHA, the minimum 3.5% down payment can be paid by the gift of equity, which also covers closing costs.
Debt Payoff: It is not common for people to use their gifts to pay off taxes, but the Federal Housing Administration guidelines allow it. Use a gift fund if it helps lower your debt-to-income ratio so you can easily qualify for a mortgage.
Lender Requirements: Lenders must record all documents regarding these transactions properly, such as stating in writing that no loan was involved and repayment is not expected. They also need to determine whether settling debts aligns with their policies based on what they know about internal procedures at different banks and national rules set forth by HUD.
Approval Process: It will work best to discuss this idea early enough with your loan officer, who should be able to tell whether such an arrangement meets the necessary conditions, depending on which they may have obtained approval beforehand from appropriate quarters since they vary considerably.
Usually, when buying through an FHA program, you would use a gift of equity for the down payment and closing costs. However, it could also pay off debt under the lender’s policy. Make sure you follow the rules set by HUD and consult with your lender about how it will affect the approval process before deciding anything.