August 3, 2018
FHA loan rules governing down payments and down payment assistance are found in HUD 4000.1, the FHA single-family loan handbook. FHA loan rules require both a minimum down payment and also that the down payment comes from an approved source.
FHA loan rules permit borrowers to get down payment assistance from third parties, but when down payment help is offered, it must meet the same types of requirements that borrower-provided down payment funds. What are the rules for down payment assistance for FHA mortgages?
FHA Home Loan Down Payments Must Be Sourced Properly
FHA loan down payment money can come from a borrower’s cash reserves, cashed-in investments, checking accounts, and a variety of other sources. But it cannot come from a payday loan, cash advance, or other restricted sources.
The lender must be able to properly verify and document the source of your down payment, so if the money is available in cash, the lender won’t be able to accept cash-instead the cash must be deposited and there must be a paper trail in order to properly track the funds.
FHA Home Loan Down Payment Assistance Must Meet The Same Requirements
FHA loan rules specify that anyone providing a gift of down payment funds must present it as a legitimate gift with no strings attached.
A borrower cannot receive cash back on an FHA mortgage, so any gift funds that are meant to be applied to the down payment may be required to be applied directly or in a manner specified by the lender. State law, lender standards, and other requirements may affect how this is done.
FHA Home Loan Down Payment Assistance Cannot Come From Certain Parties To The Loan
HUD 4000.1 states that down payment funds must not come from:
- (1) the seller of the Property;
- (2) any other person or Entity who financially benefits from the transaction (directly or indirectly); or
- (3) anyone who is or will be reimbursed, directly or indirectly, by any party included in (1) or (2) above.
HUD 4000.1 adds that “additional funds to close may be provided by one of these sources if permitted under the relevant source of funds requirements above” but “none of the Borrower’s MRI may come from these sources”.
This basically means that a seller may be allowed to provide cash to close the deal but NOT in the form of down payment assistance.
Sellers may contribute up to six percent of the price of the home in the form of closing costs or other expenses provided the contributions do not result in an “inducement to purchase” which would result in a dollar-for-dollar reduction in the FHA loan amount for any money deemed to be such an inducement (by the lender).
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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