FHA home loans require a minimum 3.5% down payment as a condition of the loan. In some cases, depending on state law, the availability of a program, and other factors, certain borrowers may be eligible for some form of down payment assistance.
This assistance is often intended for first time home buyers, which may create some confusion–it’s easy to mistakenly assume FHA loans themselves offer some kind of incentive for first time home buyers, or that the FHA provides down payment assistance.
Neither of those two things are true–the FHA offers no preferential treatment to first-time buyers nor does it require more of second-time buyers. The FHA itself does not offer any form of down payment assistance.
However, the FHA single family home loan program rule book, HUD 4000.1, does clarify policy on what is and is not acceptable in terms of down payment funds, including any potential funds from a down payment assistance program. For starters, HUD 4000.1 states:
“FHA does not approve downpayment assistance programs administered by charitable organizations, such as nonprofits. FHA also does not allow nonprofit entities to provide gifts to pay off:
The Mortgagee must ensure that a gift provided by a charitable organization meets the appropriate FHA requirements, and that the transfer of funds is properly documented.”
As you can see from the quote above, down payment funds are carefully examined to insure they come from approved sources. HUD 4000.1 adds that the lender is responsible for “…ensuring that an Entity providing downpayment assistance is a charitable organization as defined by Section 501(a) of the Internal Revenue Code (IRC) of 1986 pursuant to Section 501(c) (3) of the IRC. One resource for this information is the IRS Exempt Organization Select Check, which contains a list of organizations eligible to receive tax-deductible charitable contributions.”
Some borrowers may remember the rise and eventual cancellation of seller-funded down payment assistance programs. In 2008, the President signed the Housing and Economic Recovery Act of 2008, which made seller-funded down payment assistance illegal for loans backed by the Federal Housing Administration.
Prior to this a home seller could contribute up to 6% to the buyer to cover either a down payment or closing costs on an FHA loan. Borrowers who investigated their down payment assistance options prior to 2008 may remember such programs, but all seller-funded assistance programs for FHA loans have been cancelled.
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