September 12, 2017
Can I use disaster relief for my FHA loan down payment? That question is on the minds of many in the wake of hurricanes, forest fires, and other natural disasters.
FHA home loans have a minimum required investment or down payment of 3.5% of the adjusted value of the home. Depending on circumstances including marginal credit scores, some transactions may require a higher down payment. But the down payment is required no matter what, and FHA loan rules state the down payment must come from approved sources.
That means a borrower will be required to furnish the lender with information about the source of the FHA loan down payment. Borrowers can use cash saved at home, money from investments or savings clubs, even gift funds from approved sources.
Those approved sources may include disaster relief grants and loans IF they meet FHA loan requirements.
FHA loan rules in HUD 4000.1 include a definition of these grants and loans. With respect to disaster relief loans, HUD 4000.1 states, “Disaster Relief Loans refer to loans from a Governmental Entity that provide immediate housing assistance to individuals displaced due to a natural disaster.”
For disaster relief grants, HUD 4000.1 states, “Disaster Relief Grants refer to grants from a Governmental Entity that provide immediate housing assistance to individuals displaced due to a natural disaster”.
So we can see that the FHA requirement for both grants and loans is that in order to be used for a borrower’s down payment or minimum required investment (MRI), the funds must come from the government.
When it comes to disaster relief grants, FHA loan rules in HUD 4000.1 include the following:
“The Mortgagee must verify and document the Borrower’s receipt of the grant and terms of use. Any grant of the Borrower’s MRI must also comply with the additional requirements set forth in ‘Source Requirements for the Borrower’s MRI’.” That means the grants are subject to the same level of scrutiny by the lender as any other type of gift funds used for the MRI.
For disaster relief loans, FHA loan rules state:
“Secured or unsecured disaster relief loans administered by the Small Business Administration (SBA) may also be used. If the SBA loan will be secured by the Property being purchased, it must be clearly subordinate to the FHA- insured Mortgage, and meet the requirements for Secondary Financing provided by Governmental Entities.”
Furthermore, any loan of this type going toward the MRI/down payment, “must also comply with the additional requirements set forth in Source Requirements for the Borrower’s MRI. Any monthly payment arising from this type of loan must be included in the qualifying ratios.”
If you aren’t sure whether a disaster relief grant or loan qualifies to be used as part of your down payment, discuss your concerns with a loan officer.
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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