The FHA loan program is designed to help borrowers get into an affordable home.
However, those new to the FHA loan program might not realize there are up front expenses which must be budgeted for; unlike the VA loan program administered by the Department of Veterans Affairs, the FHA loan program does not feature a “no down payment” option.
FHA home loans have a required down payment the FHA regulations describe as a “minimum investment”. FHA loan rules as found in HUD 4155.1 describe the up-front costs of an FHA loan (including the down payment) as follows:
“Under most FHA programs, the borrower is required to make a minimum downpayment into the transaction of at least 3.5% of the lesser of the appraised value of the property or the sales price. Additionally, the borrower must have sufficient funds to cover borrower-paid closing costs and fees at the time of settlement.
Funds used to cover the required minimum downpayment, as well as closing costs and fees, must come from acceptable sources and must be verified and properly documented.”
Note the wording of that last sentence. The money paid for these costs must be verified and documented. There are guidelines as to the acceptable sources of this money (borrower savings or other assets, some contributions by the seller where permitted, and other sources described below) an unacceptable sources (unsecured loans, or credit card cash advances).
What does the FHA loan rulebook say about the acceptable sources of FHA down payment and up front expense funds? Here is a partial list:
Earnest money deposit
Savings and checking accounts
Cash saved at home
Cash accumulated with private savings club
401(k) and Keogh accounts
Stocks and Bonds
Thrift Savings Plans
This is not a complete list–ask your loan officer for more information on acceptable sources. Unacceptable sources include grants or loans to the borrower by anyone with a financial interest in the transaction. According to the FHA, “The seller, real estate agent or broker, lender, or other interested party may not provide such funds. Unacceptable borrowed funds include
unsecured signature loans
cash advances on credit cards
borrowing against household goods and furniture
other similar unsecured financing.”
For more information on accepted and unaccepted sources of down payment funds and other up front costs, talk to a loan officer.
Do you have questions about FHA home loans? Ask us in the comments section.