December 4, 2013
There are many questions about the required minimum downpayment for FHA home loans. Borrowers are required to put a minimum amount (3.5%) down on the FHA loan, and the money used to make this down payment must come from what the FHA terms “approved sources”. Those sources can include the borrower’s own money from savings, investments, cashed-in stocks, and many other accounts.
Why does the FHA put scrutiny on the sources of down payment money? One reason is to avoid conflicts of interest between lender and borrower–the lender cannot provide down payment funds to the borrower, for example. A borrower who cannot afford to make a down payment out-of-pocket may need to apply for a collateralized loan for some or all of the downpayment amount. FHA loan rules permit this as long as the loan meets its requirements.
The first of those requirements is that the loan be secured or collateralized. That means you can’t use a payday loan, credit card cash advance, or any other type of loan that has no “real property” or collateral securing it. Let’s look at what FHA loan rules say about loan money used as a down payment on an FHA mortgage:
“The borrower may obtain a loan for the total required investment, as long as satisfactory evidence is provided that the loan is fully secured by assets such as investment accounts or real property. These assets may include stocks, bonds, and real estate other than the property being purchased.
Certain types of loans secured against deposited funds, where repayment may be obtained through extinguishing the asset, do not require consideration of repayment for qualifying purposes. The asset securing the loan may not be included as assets to close, or otherwise considered available to the borrower. The deposited funds can be used for
• signature loans on certificates of deposit
• loans on the cash value of life insurance policies, or
• loans secured by 401(k) accounts.”
The second rule for using a loan to make an FHA loan downpayment is, as mentioned above, that the loan come from a third party. Chapter Five of HUD 4155.1 says, “An independent third party must provide the borrowed funds for collateralized loans. The seller, real estate agent or broker, lender, or other interested party may not provide such funds.”
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get preapproved for an FHA loan at www.FHA.com, a private company and not a government website.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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