July 23, 2015
In our previous blog post we discussed some of the rules for down payment funds on an FHA home loan. Did you know the FHA requires its participating lenders to verify the sources of all down payment money? This is to prevent funds coming from unacceptable sources such as credit card cash advances or payday loans.
Borrowers are permitted to bring in a down payment with money saved at home, but the FHA loan rulebook has specific instructions to the lender about how this type of down payment money is to be verified and handled.
Chapter Five of HUD 4155.1 tells the lender that money saved at home should be verified with help from the borrower who must provide specific information about the funds.
“To verify cash saved at home, the borrower must explain in writing how the funds were accumulated, and the amount of time it took to accumulate the funds.” That’s a very important factor in the process–the borrower needs to document the funds, and knowing that requirement in advance can save a great deal of time and frustration compared to those who have to reconstruct a timeline of their save-at-home activities on short notice.
And that’s not the only thing that must occur in order for the cash saved at home to be verified and counted as a legitimate form of down payment.
Chapter Five also explains, “The lender must determine the reasonableness of the accumulation, based on the time period during which the funds were saved, and borrowers income stream, spending habits, documented expenses, and history of using financial institutions.”
As you can see, the FHA loan rules are keen on preventing unverifiable funds from being used as a source of down payment.
The extensive documentation required for cash saved at home seems to be the FHA’s way of closing loopholes on down payment funds to prevent a third party from supplying an otherwise un-allowed type of down payment assistance in the form of cash to the applicant. Regardless of the FHA’s original intentions for creating these rules, borrowers who plan to use cash saved at home should know and understand these requirements to get best results from the FHA loan application process.
Do you have questions about FHA loans or down payment rules for FHA loans? Ask us in the comments section.
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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