May 12, 2021
Are you struggling to save enough money for a down payment for a home loan? It’s tempting to turn to quicker sources of funds for that minimum required investment, but FHA loan rules say some potential sources for down payment money cannot be used.
Those prohibited sources include considering cash advances from a credit card, payday loans, and certain other sources for a larger sum of money that can be used for a down payment including down payment “gifts” that actually have an expectation of repayment.
The guidelines that cover these downpayment issues are found in HUD 4000.1, also known as the FHA Lender’s Handbook. The rules? For any type of FHA loan that requires a down payment (a new purchase loan, an FHA One-Time Close construction mortgage, condo loan, mobile home loan, etc). there are strict rules about the sourcing of down payment money.
What Kind Of Downpayment Sources Are Prohibited?
Those prohibited sources include money that cannot be traced to a specific source, down payment assistance from the seller, pink slip loans, payday loans, credit card cash advances, or other types of lending identified as “non-collateralized loans”.
These not guaranteed by collateral and the lender is specifically tasked with making sure these loans and cash advances are never used for a down payment.
Why You Should Not Use These Sources
Aside from the fact that FHA loan rules don’t allow you to make a down payment with the sources named above, it is a terrible idea to consider them even if they WERE permitted.
For example, payday loans and pink slip loans are extremely high-cost options that generally have a bad reputation for being predatory lending.
Such loans can cost the borrower a lot–as much as $15 per $100 loaned, and that may be before late fees and other add-ons. If you are having trouble affording a down payment, it’s a bad idea to consider a payday loan for such a high dollar amount–your debt trouble in such cases may only be just getting started.
Credit card cash advances are not the same as payday loans, but the interest rates can be higher than you might expect and the long-term cost of a credit card cash advance may be higher than you would otherwise choose to pay.
There are better ways to get help with down payment funds than this option-in the end not using a credit card cash advance is a benefit to the borrower. Interest rates add up over time–you do not want your home loan to cost more than necessary.
You can explore down payment assistance program options if you need financial assistance with your minimum required investment for the FHA mortgage.
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.
Browse by Date: