September 21, 2019

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FHA Loan Down Payment Rules: When More Is Required

FHA Loan Down Payment Rules: When More Is Required

FHA home loan down payment rules allow for a low 3.5% down for borrowers who qualify with FICO scores in the 580-or-above category.

FHA loan minimums do not address lender standards, which may be higher, but that is one reason why it’s important to shop around for the right FHA lender.

The low FHA loan down payment is one reason why FHA mortgages can be so attractive, especially for first-time home buyers. But when will a borrower be required to put a higher amount down on the mortgage? There are several instances to be mindful of.

FHA Loan Transactions That Require 15% Down: Identity Of Interest

The FHA Single Family Loan Handbook, HUD 4000.1, says there are circumstances where 15% down is required; often when there is an identity of interest between the seller and the borrower. What does “identity of interest” mean?

HUD 4000.1 states, “An Identity-of-Interest Transaction is a sale between parties with an existing Business Relationship or between Family Members. Business Relationship refers to an association between individuals or companies entered into for commercial purposes.”

The 15% down payment requirements for these types of transactions, also known as an 85% LTV limit, can be waived under the right circumstances. They include situations where the borrower buys a home from another family member, or when a borrower has acted as a tenant in the home to be purchased for six months before buying the house from another family member.

In the landlord/tenant situation, there must be written documentation of the agreement such as a lease or contract, the rent payments, and other details as required by the lender.

Other exceptions to the 15% down / 85% LTV Limit include the following:

Tenant Purchase (Non-Family)

Above, we describe the exception for family members renting to another relative before the relative purchases the property. There is also a version of this exception for a landlord-tenant relationship without family ties. From HUD 4000.1:

“The 85 percent LTV restriction may be exceeded if the current tenant purchases the Property where the tenant has rented the property for at least six months immediately predating the sales contract. “

Builder’s Employee Purchase

HUD 4000.1 instructs the lender that the 85 percent LTV restriction may be exceeded “if an employee of a builder, who is not a Family Member, purchases one of the builder’s new houses or models as a Principal Residence”. Lender standards or other requirements may also apply.

Corporate Transfer

There is an exception made in cases where “…a corporation transfers an employee to another location, purchases the employee’s house, and sells the house to another employee.” Again, lender requirements, state law, or other factors may apply.

FHA Loan Transactions That Require 25% Down

HUD 4000.1 says that in cases where a non-occupying co-borrower is present on the mortgage, the loan is limited to 75% loan-to-value and would require a 25% down payment. There are exceptions to this rule, which include the following:

“For Non-Occupying Borrower Transactions, the maximum LTV is 75 percent. The LTV can be increased to a maximum of 96.5 percent if the Borrowers are Family Members, provided the transaction does not involve:

  •  a Family Member selling to a Family Member who will be a non– occupying co-Borrower; or
  •  a transaction on a two- to four-unit Property.”

As always, additional lender standards, state law, and other variables may factor in and it’s always best to ask a loan officer how these rules may affect your specific FHA home loan.

Joe Wallace - Staff Writer

By Joe Wallace

August 23, 2019

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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