October 20, 2021
Who my contribute to my FHA home loan? That is a question many want to know, and the answers don’t always point to the most obvious type of contribution the borrower may seek-the FHA mortgage loan required down payment.
How much and to which areas can an interested party contribute to for the borrower’s FHA mortgage?
FHA loan rules governing this topic are found in HUD 4000.1, the FHA Loan Handbook for single-family mortgage loan transactions. To begin, it should be noted that down payment source funds are strictly regulated and must come from a verifiable source the lender can investigate to make sure FHA loan rules have been followed.
In general, down payment contributions cannot come from interested parties to include “sellers, real estate agents, builders, developers or other parties with an interest in the transaction” according to FHA loan rules. At this stage, the borrower might be left with the impression that interested parties as mentioned here cannot contribute ANY cash to the transaction.
But that is not true. It just cannot come in the form of a down payment gift or loan from the interested parties. What CAN an interested party contribute toward your home loan?
FHA loan rules in HUD 4000.1 are precise-there are a variety of applications for such contributions (see below) but the entire amount of the contribution is limited to six percent of the home’s sale price.
According to HUD 4000.1, interested parties may contribute as defined below:
“Interested Parties may contribute up to 6 percent of the sales price toward the Borrower’s origination fees, other closing costs and discount points. The 6 percent limit also includes:
- Interested Party payment for permanent and temporary interest rate buydowns, and other payment supplements;
- Payments of mortgage interest for fixed rate Mortgages;
- Mortgage Payment protection insurance; and
- Payment of the UFMIP.”
Again, please note that down payments are specifically left off of that list. And what’s more, payments in excess of the six percent rule are subject to further review by the lender. And the percentage points are only part of the matter, according to the FHA loan handbook:
“Interested Party Contributions that exceed actual origination fees, other closing costs, and discount points are considered an inducement to purchase. Interested Party Contributions exceeding 6 percent are considered an inducement to purchase.”
Why is the inducement to purchase issue so important? Any contribution in excess of six percent or otherwise not permitted by FHA loan rules can be judged to be an inducement to purchase; FHA loan rules require the lender to reduce the amount of the loan dollar-for-dollar for any such inducement.
Down payment sources and interested party contributions are both held to a certain set of FHA loan standards. But some things are not considered to be interested party contributions and would not count towards the six percent. That includes third party payment of real estate agent fees, commissions, or fees traditionally paid by a certain party to the loan transaction in that housing market.
You may need to check with your loan officer to see what may apply in your transaction depending on location and the lender. Additional lender requirements and state law may also apply above and beyond FHA loan rules.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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