Some borrowers want to know if they can make their FHA home loan down payment in cash. The FHA loan down payment rules that govern single family home loan down payment sources are found in HUD 4000.1. They have specific requirements for the source of all down payment funds for an FHA mortgage.
It does not matter whether you are applying for an FHA rehab loan, an FHA new purchase mortgage for existing construction, or whether you want an FHA mortgage to construct a home to suit your needs; a minimum down payment is required above and beyond all other closing costs and expenses related to the mortgage.
FHA loan rules state that the lender must verify all down payment funds and make sure they come from approved sources.
FHA mortgage loan rules say that “cash on hand”, or cash the borrower has that is not been deposited at a financial institution may be an acceptable source of down payment funds. However, you cannot bring that cash to the closing date and give the lender the money. It must be deposited and documented.
HUD 4000.1 confirms this on page 302 of HUD 4000.1, first by defining what the FHA calls cash on hand:
“Cash on Hand refers to cash held by the Borrower outside of a financial institution.” HUD 4000.1 adds that the lender is required to “verify that the Borrower’s Cash on Hand is deposited in a financial institution or held by the escrow/title company”.
Once that is done, the lender is charged with documenting the cash on hand’s sourcing. You cannot use a payday loan, a cash advance on a credit card, or other non-collateralized loans to come up with down payment funds. That means when you bring cash to the transaction, the lender will be required by HUD 4000.1 to:
- Verify and document the Borrower’s Cash on Hand;
- Get a written explanation from the borrower describing how the funds were accumulated and the amount of time it took to accumulate the funds;
- The lender is also required to determine “the reasonableness of the accumulation based on the time period during which the funds were saved;”
- Document the borrower’s income, spending habits, expenses and history of using financial institutions.
These are FHA loan standards. State law, lender requirements, and other factors may also play a part in how your transaction is handled when bringing cash for a down payment.
If you plan on doing this, it’s best to tell the lender as far in advance as possible so you know what procedures will be required to document and verify the cash.
If the cash is coming from someone else besides the borrower in the form of a gift, the same rules will apply-your lender will still need to check to make sure the cash used for the down payment is deposited in escrow and that it has been sourced according to FHA loan rules.