One of the most common questions we are asked in the comments section involves the nature of a borrower’s required minimum investment-the down payment-for an FHA mortgage. Some potential borrowers want to know if they can finance the down payment, others want to know if other closing costs might be counted as part of the down payment.
In both cases the answer is no. Closing costs are separate from the borrower’s required 3.5% minimum down payment according to HUD 4000.1. Furthermore, the down payment must be paid in cash at or before closing time and cannot be financed into the loan amount.
The money needed for a borrower’s down payment and certain closing costs are regulated by FHA guidelines. For example, a borrower can’t come up with a down payment that is sourced from cash advances, payday loans, etc. A borrower cannot get a loan for the down payment from a third party that has an interest in the transaction.
When it comes to earnest money deposits, HUD 4000.1 states, “The Mortgagee must verify and document the deposit amount and source of funds if the amount of the earnest money deposit exceeds 1 percent of the sales price or is excessive based on the Borrowers history of accumulating savings, by obtaining:
–a copy of the Borrowers cancelled check;
–certification from the deposit-holder acknowledging receipt of funds; or
–a Verification of Deposit (VOD) or bank statement showing that the average balance was sufficient to cover the amount of the earnest money deposit at the time of the deposit.”
HUD 4000.1 adds that in cases where the source of the earnest money deposit was a gift, “the Mortgagee must verify that the gift is in compliance” with FHA loan rules for gift funds.
How much money does a borrower need to close the deal for a new purchase mortgage loan or a mortgage refinance loan? According to HUD 4000.1:
“For a purchase transaction, the amount of cash needed by the Borrower to close an FHA-insured Mortgage is the difference between the total cost to acquire the Property and the total mortgage amount. For a refinance transaction, the amount of cash needed by the Borrower to close an FHA-insured Mortgage is the difference between the total payoff requirements of the Mortgage being refinanced and the total mortgage amount.”
Closing costs for home loans are not standardized. It’s impossible to speculate here how much a borrower might need to save, but the lender is required to provide a borrower with a good faith estimate of the associated costs of the loan. By law a borrower must get a “closing disclosure” (which includes a breakdown of fees and costs) within three days of closing.
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