What is an FHA loan down payment? We examined the basics in our last blog post, but one important issue related to down payment funds? Their source. FHA loan rules state that the lender must verify the source of all funds to be used in the down payment. Not all sources are eligible to be used; FHA loan rules have strict guidelines about how and where such funds may be derived.
For example, while borrowers are permitted to get down payment help from outside sources, none of those sources may have a financial stake in the outcome of the transaction. So your seller may not directly provide down payment funds, and any other contributing party cannot get reimbursement from anyone involved in the transaction.
Down Payment Source Funds: The Official FHA Loan Rules
HUD 4000.1 states clearly:
“The Mortgagee may only permit the Borrower’s 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 Borrower’s 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.”
Closing Costs Are Not Your Down Payment
There are a few reasons why your lender cannot consider closing costs part of your down payment funds, but one of them seems designed to help the borrower in other areas. HUD 4000.1, the FHA loan handbook, states the following about third-party contributions to closing costs versus third-party down payment help:
“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 Borrower’s MRI may come from these sources. The Mortgagee must document permissible sources for the full MRI in accordance with special requirements noted above.”
Down payment assistance in the form of “gift funds” cannot come with strings attached, according to HUD 4000.1. A gift must include the following required documentation:
“The Mortgagee must obtain a gift letter signed and dated by the donor and Borrower that includes the following:
-the donor’s name, address, and telephone number;
-the donor’s relationship to the Borrower;
-the dollar amount of the gift; and
-a statement that no repayment is required.”
FHA loan down payment rules state that the minimum is 3.5% of the adjusted value of the home. Higher down payments may be required in cases where lender standards require it or if the borrower has FICO scores outside the range needed for maximum financing.