FHA insured loans feature down payments as low as 3.5%. Borrowers considering the purchase of a home with an FHA or conventional mortgage should anticipate this expense as they make a budget that includes the new home purchase. There are a variety of costs associated with a home loan including the down payment, closing costs, appraisal fees and other expenses.
The down payment can be daunting for some borrowers–having enough time to save up for the expenses of a new home purchase is one reason most real estate experts and financial planners recommend borrowers spend at least a year preparing for a home loan. But even for those who take the time to plan and save, the down payment requirement may be more than they can afford.
Is there any hope for those on strict budgets who can afford the monthly mortgage but struggle to come up with a down payment on an FHA insured home loan?
According to the FHA, down payment money can be supplied by a relative in the form of gift funds–this money is required to be deposited and proof of deposit must be shown. But gift money isn’t the only option for borrowers who need help making a down payment. The FHA also permits the applicant to use borrowed money for the down payment, subject to FHA guidelines.
According to the FHA, “Funds can be borrowed for the total required investment as long as satisfactory evidence is provided that the funds are fully secured by investment accounts or real property. Such assets may include stocks, bonds, real estate (other than the property being purchased), etc.”
The FHA also permits some kinds of signature loan money to be used as the down payment on a mortgage. The rules say “certain types of loans secured against deposited funds, such as signature loans, the cash value of life insurance policies, loans secured by 401(k)s, etc., in which repayment may be obtained through extinguishing the asset; do not require consideration of a repayment for qualifying purposes.”
In these cases, the assets securing the down payment loan amount “may not be included as assets to close or otherwise considered as available to the borrower.” FHA rules say down payment loan money cannot come from unsecured loans or credit card cash advances.
The origin of the loan money is also restricted by “interest”. If the borrower takes out a loan for an FHA loan down payment, that loan must come from a third party unconnected to the sale of the home. Anyone with a financial stake in the outcome of the sale of the property is forbidden from issuing a loan for down payment purposes–including the seller, the broker, or the lender issuing the FHA mortgage.