June 6, 2018
What are the FHA loan rules for down payments and the cash required to close the deal?
There are many requirements in this area, but one very important detail exists that borrowers should know that will definitely help them in the early planning and budgeting stages of the mortgage. FHA loan rules require that certain expenses be kept separate from down payment requirements, and that can make a big difference in how you approach the budgeting part of home loan planning.
FHA loan rules for both down payments and closing costs require that the sources of these funds be FHA-approved, which means no credit card cash advances, payday loans, or similar types of indebtedness can be a source of the closing costs or down payment.
That’s important because those FHA guidelines require the borrower to find acceptable sources for down payment/closing cost money including cash saved at home, checking/savings account funds, cashed-in investments, and similar resources.
What do borrowers need to know going into the FHA home loan saving and budgeting phase of their planning? One very important thing:
Closing costs are NOT considered part of the borrower’s minimum required down payment of 3.5%. You cannot use the closing costs as part of the down payment because the down payment is a completely separate expense from the other cash requirements to close the FHA mortgage.
For such expenses-the cash required to close separate from the down payment and the down payment itself, gift funds may be permitted if they meet FHA loan requirements.
One thing to recognize is that while a third party who does not financially gain from the transaction can contribute gift funds, the seller can also contribute up to six percent of the borrower’s closing costs without a penalty.
But that contribution CANNOT be used as part of the borrower’s down payment funds.
Those separations may seem “cosmetic” to a borrower who isn’t very familiar with the finer points of mortgage loan processing, but the separation is very important for the lender and others who stand to gain financially from your FHA mortgage loan transaction.
Federal guidelines must be met, and the borrower should know that such divisions in terms of what funds can be applied to a specific aspect of the loan transaction are required by law.
So when budgeting for your home loan, you will need to calculate an estimated down payment AND estimate your other closing costs apart from the down payment including property taxes, insurance where required, any applicable discount points, and other expenses.
Remember, state law, lender standards, and other requirements may apply in addition to FHA loan requirements, so discuss your concerns with a lender if you aren’t sure how these rules affect your FHA mortgage transaction.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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