Do you know what the rules are for down payments according to the FHA Lender’s Handbook?
HUD 4000.1 states that the minimum required down payment allowed for FHA mortgages is 3.5% of the adjusted value of the home. The borrower must pay this independently of any other closing costs associated with the loan.
The seller, lender, or any other party with a stake in the outcome of the transaction cannot provide down payment funds to the borrower. Sellers are permitted to contribute toward closing costs, but not the down payment.
The down payment is part of the borrower’s cash requirement to close the loan. The lender is required to verify the sourcing of all down payment funds (including gift funds from other people) to insure the money does not come from prohibited sources such as a credit card cash advance or a payday loan.
HUD 4000.1 addresses this issue directly, stating:
“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.”
HUD 4000.1 adds the acknowledgment of seller contributions to closing costs and related contributions while reminding the lender that closing costs are not the same as down payment requirements. None of the seller’s funds can be used for the down payment.
HUD 4000.1 also instructs the lender that in cases where the borrower’s down payment is provided in full or in part by someone else, those funds must be verified in the same manner as if the borrower had provided them.
Your lender may require documentation from any third party contributing funds including bank statements, canceled checks, wire transfer receipts or other documentation. If the lender cannot verify the source of the funds, or if the source is determined to be unacceptable, the borrower cannot use them for the down payment.
If you have friends, family, co-workers, or employers willing to contribute funds toward your down payment, it’s best to talk to them in advance about the source requirements for these gift funds.
Explain that your loan officer needs to document the money properly and ask the lender what the preferred method of receiving down payment gifts is at that financial institution. Procedures may vary from lender to lender, so it’s best to ask before receiving any down payment assistance.