July 12, 2017
What is an FHA loan down payment? Simply put, your down payment on a home loan is an investment paid up-front which is separate from other loan expenses.
The original idea behind making a down payment likely had something to do with the idea that a borrower who has invested a serious portion of cash up front on the home purchase has a greater interest in paying their mortgage, not defaulting on the loan, and being a successful home owner.
FHA loan rules which govern the down payment are found in HUD 4000.1, the FHA loan handbook, and have plenty to say about the amount and sourcing of an FHA mortgage loan down payment.
What Is An FHA Loan Down Payment?
The FHA loan handbook describes the down payment, also known as a Minimum Required Investment. “Minimum Required Investment (MRI) refers to the Borrower’s contribution in cash or its equivalent required by Section 203(b)(9) of the National Housing Act, which represents at least 3.5 percent of the Adjusted Value of the Property.”
The down payment is rendered as a separate expense. The Up Front Mortgage Insurance Premium, closing costs, appraisal fees, pest control fees, and other expenses cannot be considered part of the borrower’s MRI or down payment. The lender is not permitted to include closing costs or other payments as part of the MRI. HUD 4000.1 codifies this in writing, stating:
“Closing costs, prepaid items and other fees may not be applied towards the Borrower’s MRI.”
Adding Certain Funds To The MRI
HUD 4000.1 permits certain money paid back as refunds to be transferred to the down payment under specific circumstances. This applies for funds paid outside of closing (POC) that meet FHA criteria. From HUD 4000.1:
“The Mortgagee may apply Interested Party credits to the closing costs and prepaid items including any items Paid Outside Closing (POC). The refund of the Borrower’s POCs may be used toward the Borrower’s MRI if the Mortgagee documents that the POCs were paid with the Borrower’s own funds.”
“The Mortgagee must identify the total Interested Party credits on the front page of the Closing Disclosure or similar legal document or in an addendum.”
Some real estate tax credits may also be used towards the down payment or MRI. From HUD 4000.1:
“Where real estate taxes are paid in arrears, the seller’s real estate tax credit may be used to meet the MRI, if the Mortgagee documents that the Borrower had sufficient assets to meet the MRI and the Borrower paid closing costs at the time of underwriting. This permits the Borrower to bring a portion of their MRI to the closing and combine that portion with the real estate tax credit for their total MRI.”
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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