September 22, 2021
What are the rules for FHA loan down payments? Some first-time homebuyers looking for a first home don’t realize you can’t just make the down payment by providing a check to your lender.
There are strict rules about down payments–they must come from approved sources, they must be accompanied by any supporting documentation showing where the money comes from, etc.
You, the borrower, are allowed to apply for a home loan and make a down payment on the house you make an offer on, but when you make that down payment you must document the sourcing of the money.
As in, where did it come from? A cashed-in investment? That’s permitted under FHA loan rules. Did your down payment money come from a pink slip loan or a credit card cash advance? That money is NOT permitted.
That’s not the total list of rules about your down payment funds, just a sample. Who sets these rules and why?
The guidelines for participating FHA lenders are found in HUD 4000.1, the FHA Single Family Lender’s Handbook.
The FHA loan rules are not the only ones that affect your down payment–your lender will have certain requirements of their own in some cases.
And the most important thing to do is to ask the loan officer you work with what you should specifically do to make sure your down payment money is acceptable to the lender.
And here are some examples of what they will tell you–this is not a complete list of considerations but it’s a great place to begin a more informed conversation with your bank.
Down payment funds for your FHA purchase loan may come from your personal savings, checking, investments, even cashed-in retirement funds may be used as long as you follow the lender’s requirements for doing so as well as the rules for your retirement account.
Not all retirement plans allow you to do this, so ask early.
Down payment funds may also come from a local program offering first-time homebuyer assistance with a down payment grant or other types of funds. Ask your lender if a specific program is acceptable to that financial institution–the FHA does NOT vet or approve these agencies.
Down payment funds may NOT come from a payday loan, a credit card cash advance, pink slip loan, or in the form of “gifts” which are really loans in disguise.
Furthermore, your seller cannot contribute to your down payment. The seller is permitted to contribute a limited amount toward your CLOSING COSTS, but not the downpayment.
Your lender will question any large deposit or credit to your accounts that might be a source of down payment funds–it is best to have full documentation for such deposits–if the lender cannot properly source the funds, your down payment money may have to come from elsewhere.
Learn About the Path to Homeownership
Take the guesswork out of buying and owning a home. Once you know where you want to go, we’ll get you there in 9 steps.
Step 1: How Much Can You Afford?
Step 2: Know Your Homebuyer Rights
Step 3: Basic Mortgage Terminology
Step 4: Shopping for a Mortgage
Step 5: Shopping for Your Home
Step 6: Making an Offer to the Seller
Step 7: Getting a Home Inspection
Step 8: Homeowner’s Insurance
Step 9: What to Expect at Closing
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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