February 2, 2016
FHA loans require a minimum down payment of 3.5%–that’s typical for many FHA mortgages. In some cases, depending on the nature of the loan and the borrower’s financial qualifications and FICO scores, the required down payment may be higher. But no matter what the down payment amount might be (and it will vary from loan to loan) the FHA has specific rules governing the sources of and verification for down payment funds.
The FHA loan rulebook for single family mortgage loans is HUD 4000.1, which refers to the down payment as a “minimum required investment”:
“Minimum Required Investment (MRI) refers to the Borrowers contribution in cash or its equivalent required by Section 203(b)(9) of the National Housing Act, which represents at least 3.5 percent of the Adjusted Value of the Property.”
The lender may “only permit the Borrowers MRI to be provided by a source permissible under Section 203(b)(9)(C) of the National Housing Act, which means the funds for the Borrowers MRI must not come from:
(1) the seller of the Property;
(2) any other person or Entity who financially benefits from the transaction (directly or indirectly); or
(3) anyone who is or will be reimbursed, directly or indirectly, by any party included in (1) or (2) above.”
It’s important to remember that there is a difference between the borrower’s down payment funds and other money required to close the deal. Down payment funds cannot come from any party listed above, but those parties are permitted to contribute certain closing costs, according to HUD 4000.1:
“While additional funds to close may be provided by one of these sources if permitted under the relevant source of funds requirements above, none of the Borrowers MRI may come from these sources. The Mortgagee must document permissible sources for the full MRI in accordance with special requirements noted above.”
So the lender will be required to document and verify the sources of both the down payment and any funds that come from a third party to pay for closing costs.
This also applies when the borrower has an acceptable source of down payment money–funds that do not come from the borrower but are supplied by someone else in accordance with FHA loan rules. “Where the Borrowers MRI is provided by someone other than the Borrower, the Mortgagee must also obtain documentation to support the permissible nature of the source of those funds.”
As you can see, the FHA takes the source of these funds very seriously and borrowers should expect to provide documentation showing how the money was provided.
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:
http://www.fha.com/fha_loan_limits_widget
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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