August 19, 2024
One of the biggest worries for some borrowers interested in buying or building a home? The down payment.
At the time of this writing, there are not many zero-down payment mortgages offered nationally by participating lenders offering government-backed mortgages; they include VA mortgages and certain USDA single-family home loans.
USDA home loans are need-based mortgages with income caps and purchase price limits; VA mortgages are only for those with qualifying military service and certain surviving spouses of those who have died due to military service.
There is no need-based requirement for FHA mortgages, and you do not have to be a veteran or a first-time home buyer to apply for one. FHA loans are offered to all who financially qualify, with no income limits.
FHA down payment rules include a minimum of 3.5% down payment, which is a higher requirement for those with FICO scores below 580.
The “580 rule” is the FHA minimum. Your participating lender may choose a higher standard, which is why it’s a good idea to shop around for an FHA lender.
Other rules for FHA loan down payments? You can get help with your down payment if that assistance comes from approved sources. For example, the lender cannot gift you money for your down payment on an FHA mortgage.
Nor can the seller. These parties have a financial stake in the transaction and therefore cannot provide you with down payment assistance.
A family member, friend, employer, or even a third-party agency can provide legitimate gifts of down payment funds as long as these gifts have no expectation of repayment.
Suppose you have friends or family providing down payment help. In that case, the lender will require those funds to be properly documented, and they may not come from sources like payday loans, credit card cash advances, or other non-collateralized loans.
How on earth will the lender know where the money came from? That’s a question some ask, and the answer sometimes surprises them. The lender may ask you for the bank transaction records associated with your downpayment funds to verify the sources.
If you cannot show a paper trail for the gift funds, the lender may be unable to accept them.
In cases like these, the best thing to do is hold off on accepting down payment gift funds until you can speak to the lender to ask what the right procedure is for down payment gifts. Learn what the lender requires first and follow that to the letter for best results.
Down payment money has strict rules. Your participating lender is the best source of information on how to accept down payment gifts, how to document them, and how to follow the FHA loan rules in this area.
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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