August 11, 2015
We’ve been discussing factors that can require an FHA borrower to make a large payment. Such factors can include loans where there is a non-occupying co-borrower, loans where there is an “identity of interest”, and situations where a parent is both the seller and the co-borrower on an FHA single family home loan.
What other factors can require a larger down payment on your FHA home loan?
In certain instances where an FHA borrower is building a home on his/her own land, the down payment requirement may change depending on specific details of the loan. HUD 4155.1 Chapter Two Section B states of these transactions:
“A borrower is eligible for maximum financing if he/she acts as a licensed general contractor and is building a home on land that he/she already owns or acquires separately, and receives no cash from the settlement.” The no-cash-back clause is an important one. Chapter Two also instructs the lender:
“When building on a borrowers own property, the appropriate loan-to-value (LTV) limits are applied to the lesser of the
–appraised value of the proposed home and land, or
–documented cost of the property.
The documented cost of the property includes the
–builders price, or sum of all subcontractor bids and materials
–cost of the land (if the land has been owned more than six months or was received as an acceptable gift, the value of the land may be used instead of
its cost), and
–interest and other costs associated with any construction loan obtained by the borrower to fund construction of the property.”
But that’s not all, FHA loan rules include instructions about what to do in cases where the borrower wants to use equity in the land as the minimum cash investment or down payment:
“Equity in the land (value or cost, as appropriate, minus the amount owed) may be used for the borrowers entire cash investment. However, if the borrower receives more than $500 cash at closing, the loan is limited to 85% of the appraised value. Replenishing the borrowers own cash expended during construction is not considered cash back, provided that the borrower can substantiate with cancelled checks and paid receipts all out-of-pocket funds used for construction.”
Calculating LTV in these cases may be tricky, but there are specific rules designed to clarify under what circumstances maximum financing may apply and when a higher down payment is required.
Do you have questions about FHA loans or FHA refinance loans? Ask us in the comments section. All comments are held for review.
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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