September 20, 2016
FHA home loans differ from conventional mortgages in many ways, and one of those ways is that a lower down payment is required with FHA mortgages than for many conventional loans.
A conventional mortgage may require a down payment of ten percent or more, depending on the borrower’s financial qualifications and other factors. But the FHA loan minimum down payment is (in most cases) 3.5% of the adjusted value of the property.
But there are specific rules governing the down payment for mortgage loans, and FHA mortgages are no exception. The borrower’s “minimum required investment” or MRI (as HUD 4000.1 describes the down payment) must come from approved sources. Those sources can include a borrower’s own funds, gift funds that meet FHA requirements, cashed-out investments, proceeds from retirement accounts that meet FHA requirements, and other sources.
What the borrower cannot do in order to make the MRI payment is use proceeds from uncollateralized loans, payday loans, pink slip loans, etc. to make the down payment. The borrower’s ability to use gift funds as mentioned above is made possible only if the gift funds are properly documented and incur no obligation to the borrower to repay.
Down payment sources must be verified even when the money comes from the borrower’s own savings or checking accounts. According to HUD 4000.1, “The Mortgagee must verify and document the existence of and amounts in the Borrowers checking and savings accounts. For recently opened accounts and recent individual deposits of more than 1 percent of the Adjusted Value, the Mortgagee must obtain documentation of the deposits. The Mortgagee must also verify that no debts were incurred to obtain part, or all, of the MRI.”
When it comes to sources of your down payment coming from “cash saved at home” or “cash on hand”, FHA loan rules also require proper documentation.
HUD 4000.1 defines cash on hand as follows: “Cash on Hand refers to cash held by the Borrower outside of a financial institution.” When it comes to documenting it as a source of down payment funds, “The Mortgagee must verify and document the Borrowers Cash on Hand by obtaining an explanation from the Borrower describing how the funds were accumulated and the amount of time it took to accumulate the funds.”
“The Mortgagee must also determine the reasonableness of the accumulation based on the time period during which the funds were saved and the Borrowers:
-income stream;
-spending habits;
-documented expenses; and
-history of using financial institutions.”
As you can see, there are definitely things to consider when preparing your down payment funds. A borrower who is prepared to give documentation to the lender as required above will save time and effort during the FHA mortgage loan approval process.
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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