September 12, 2014
We get frequent questions about FHA loan rules concerning down payments. Borrowers want to know how much money down the FHA requires for a single family home loan transaction, and unfortunately some borrowers mistakenly believe there is a single dollar amount that must be paid.
The reality is that the required FHA down payment amount is a percentage of the loan rather than fixed dollar amount. That means every FHA loan down payment can be different depending on the transaction.
Typically the FHA down payment requirement is 3.5%. That down payment requirement can be higher if the borrower has marginal credit qualifications that might force the lender to seek “compensating factors” in order to justify the loan. A bigger down payment can be one of those compensating factors.
Another reason a larger down payment might be required is when the loan is considered an “identity of interest transaction” meaning the sale of the home is to and from people who have business or family relations. In these cases, a 15% down payment may be required.
There are exceptions to this–for example, in some cases described in HUD 4155.1 Chapter Two Section B permit a family member to sell an investment property to another family member without the 15% requirement provided “the family member has been a tenant in the property for at least six months immediately predating the sales contract. A lease or other written evidence must be submitted to verify occupancy.”
That isn’t the only exception to the identity of interest down payment requirement, but it’s a commonly encountered one. Another exception to the 15% down payment requirement for identity of interest transactions comes when a tenant wants to buy the property they have been living in. According to HUD 4155.1 Chapter Two, an exception is possible under the following conditions:
“A current tenant, including a family member tenant, purchases the property where he/she has rented for at least six months immediately
predating the sales contract.” FHA loan rules require the tenant to furnish a lease or rental agreement as proof of the arrangement.
Borrowers who need more information about why a higher down payment on an FHA loan may be required should discuss the situation they have with the loan officer to see what rules might apply in that specific circumstance.
Do you have questions about FHA loans? Ask us in the comments section.
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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