FHA home loan rules allow down payment assistance for the mortgage for both first time buyers and experienced house hunters alike. There are down payment assistance programs for first-time borrowers, there are down payment gift funds that can be provided by family, friends, or employers…but all of these are subject to FHA loan rules.
FHA Home Loan Down Payment Assistance Rules
HUD 4000.1 says down payment assistance cannot come from any entity or party that has a stake in the outcome of the home loan sale or the approval of the mortgage loan. That includes:
-The seller of the Property;
-Any other person or Entity who financially benefits from the transaction (directly or indirectly); or
Anyone who is or will be reimbursed, directly or indirectly, by any party included in (1) or (2) above.
Some borrowers get confused by this because the seller has the ability to contribute up to six percent of the sale price of the home towards closing costs of the mortgage. But closing costs are different than the down payment and FHA loan rules address this:
“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. “
Debt-Free, No Repayment Required Down Payment Assistance
Any down payment gift the borrower receives from a family member, a down payment assistance program, employer, or other source must be a legitimate gift with no expectation of repayment.
Your lender may require the down payment gift giver to certify this in writing. The lender is also required to source the funds and will require copies of canceled checks, wire transfer documents, or other relevant paperwork that shows the origin of the funds and their destination.
This is required even if a government agency (state, local, or otherwise) is providing the funds-your loan officer will still need to verify the source with the canceled check, wire transfer documents, etc.
The lender wants to know that the funds were not provided via the proceeds of payday loans, cash advances, or other prohibited sources. The borrower cannot use down payment gift funds that are not properly verified and documented by the lender.
If you are not sure where to find first-time home buyer down payment assistance programs in your area, ask your loan officer who may know from past experience dealing with local agencies.