You're already aware he has some form of mental issue? And you and your husband know that this family can use some support from time to time like gift cards?
Truly, it sounds like he is an exuberant person who doesn't "get" personal space. How wonderful, really. He is not inhibited about demonstrating his gratitude -- and his gratitude toward you and your husband is very great. Please don't crush him by letting him know you don't want his hugs. He's not seeking you out to hug you daily (if that were the case, yes, you'd have to say something); and your gut is fine with it.
If he isn't good with boundaries, being told that you have issues with his hugs might prove very distressing for him; possibly he's been working on boundaries his whole life and thinks he is doing OK. He sounds as if he might be very, very wounded if the people he sees as so thoughtful tell him they don't accept his form of gratitude, which comes to him so naturally and without the brakes that we learn from society. If something is said to him, he might feel very guilty and become overly apologetic, or might stop accepting the occasional help you give and that is certainly not your idea, I know.
Let it go, especially if you know that he is harmless. I would not say anything nor would I have my husband say anything. As you note, "Other than this, he and his family are wonderful neighbors." Why risk that over an occasional uncomfortable hug?