October 19, 2011
All FHA home loans require a down payment. In lender-speak, this is known as a “minimum required investment” from the borrower. The absolute minimum down payment for an FHA new purchase home loan is “not less than 3.5 percent of the appraised value of the property” according to FHA Mortgagee Letter 2008-23.
But what if the borrower cannot afford to pay the down payment out of pocket? FHA rules prohibit the down payment from being included in the mortgage, so what is a borrower to do in cases where they don’t have enough funds available for the minimum required investment?
According to FHA loan rules, “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.” The nature of the loan for the minimum required investment is important to take note of–any loan in these cases must be secured by “real property” or assets.
That means you can’t use a cash advance on a credit card to make an FHA loan down payment. The same is true of a signature loan or any other loan that is not collateralized, that is to say, backed by property or assets of similar value.
In cases like these, why doesn’t the participating FHA lender offer to lend the borrower down payment money?
FHA rules are designed to prevent this–many believe allowing a lender to provide additional loans for down payments could create a conflict of interest or a situation where lenders could be tempted to offer loans to borrowers not fully qualified or able to repay, due in part because of the additional profit motive in offering a “down payment loan”.
FHA rules are clear. “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.”
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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