September 23, 2011
Borrowers new to FHA loans soon learn about the requirements to qualify for the loans, which include what the FHA calls a “minimum cash investment”, which is essentially a down payment of at least 3.5% of “the lesser of the appraised value of the property or the sales price.”
But the down payment isn’t the only thing required as a minimum cash investment–something that cannot be rolled into the loan or otherwise financed.
According to HUD Handbook 4155.1, “the borrower must have sufficient funds to cover borrower-paid closing costs and fees at the time of settlement.”. FHA requirements also state that any money used to cover these minimum costs must come from “acceptable sources”. FHA rules state the lender is responsible for verifying that all money for these expenses comes from acceptable sources and are properly documented.
For example, the down payment for an FHA home loan can come from a borrower’s private savings or checking accounts. The FHA lists acceptable sources that include earnest money deposits, cash saved at home, or “cash accumulated with private savings club”.
A borrower is also free, under FHA loan rules, to cash in stocks, savings bonds, IRAs, even 401K accounts to come up with the down payment and other up-front expenses.
In addition to all these acceptable sources, there are also down payment funding sources that are not acceptable, or are likely to be disapproved by a lender once proper documentation is established. For example, down payment funds that come from some types of signature loans, cash advances from credit cards or other types of unsecured financing.
Loan proceeds used to make a down payment must be secured and issued by an independent third party. A signature loan issued with funds already deposited as the security for that loan could be considered acceptable, but may not be supplied by the lender, real estate agent or other interested party involved in the FHA loan transaction.
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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