January 16, 2014
When you apply for an FHA loan, the lender will explain that there are a variety of closing costs to anticipate including the amount of the required 3.5% FHA loan down payment. Some FHA loan applicants may struggle financially with the credit costs and seek to borrow money to cover them. FHA loan rules permit this but only under approved conditions.
A borrower’s required funds for down payment, for example, must come from an approved source such as personal savings, investments, or (in cases where a loan is required) from a secured loan. Down payment money cannot come from credit card cash advances, payday loans or other “non-collateralized” loans.
Can a family member lend an FHA borrower the funds to close?
According to FHA loan rules in HUD 4155.1, Chapter Five, Section C, the answer is yes if the loan meets FHA requirements. According to Chapter Five, “FHA permits lending from family members on a secured or unsecured basis, up to 100% of the borrower’s required funds to close. This may include the downpayment, closing costs, prepaid expenses, and discount points.”
In these situations, FHA loan rules permite certain types of arrangements that may be associated with such family member loans. “If the loan from the family member, whether borrowed from an acceptable source or the family member’s own savings, is secured by the subject property, only the family member provider may be the noteholder. FHA will not approve any form of securitization of the note that results in any entity other than the family member being the noteholder, whether at loan settlement or at any time during the mortgage life cycle.”
FHA rules add further clarification, stating, “When the funds loaned by the family member are borrowed from an acceptable source, the borrower may not be a co-obligor on the note. Example: A son may not be the co-obligor on the note used to secure the money borrowed by his parents which, in turn, was loaned to the son for the downpayment on the property.”
This type of transaction, where the FHA loan applicant borrows money from a family member for closing costs, is called “family member secondary financing”. If you’re considering such a move, discuss your options with your loan officer before committing to the loan from a family member.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.
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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