December 5, 2013
We’ve been discussing FHA loan down payments quite a lot lately–there are many questions about the required 3.5% minimum down payment for new purchase FHA home loans. This down payment is known as a “minimum cash investment” and while it is definitely lower than the money down required of many conventional loans, it can still be difficult for some borrowers to pull the money together out of pocket.
In such cases, the FHA does permit borrowers to apply for collateralized loans from third parties with no financial stake in the loan transaction. But some borrowers would rather turn to a family member for such a loan instead. Does the FHA, with its requirements that all down payment sources be scrutinized, allow such a loan from a family member?
The answer to this question can be found in HUD 4155.1, Chapter Five Section C, which says in part, “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.”
This is good news for some borrowers who definitely want to borrow the down payment from a relative. But the FHA further clarifies this rule–the nature of this type of loan must conform to FHA regulations.
“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.” That is true not only at the time the loan is made, but for the duration of the loan. According to Chapter Five Section C:
“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.”
So the bottom line is that a loan from a relative is acceptable, but the person making the loan cannot pass off that loan or payments on that loan to a third party. This is also true in cases where a family member wants to assist with other costs associated with an FHA loan but not the down payment.
“Family members may assist with the costs of acquiring a new home by providing the borrower with a loan. Only the family member provider(s) may be the noteholder if the money lent is secured against the subject property.”
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get preapproved for an FHA loan at www.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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