August 21, 2020
One of the biggest worries for some borrowers interested in buying or building a home? The down payment.
At the time of this writing, there are only two zero-down payment mortgages offered nationally by participating lenders offering government-backed mortgages; the VA mortgage and certain USDA single-family home loans.
USDA home loans are need-based mortgages with income caps and purchase price limits; VA mortgages are only for those with qualifying military service and certain surviving spouses of those who have died as a result of military service.
For FHA mortgages, there is no need-based requirement and you do not have to be a veteran OR a first-time home buyer to apply for an FHA mortgage. FHA loans are offered to all who financially qualify with no income limits.
FHA down payment rules include a minimum 3.5% down payment with a higher requirement for those with FICO scores below 580. The “580 rule” is the FHA minimum. Your participating lender may choose a higher standard which is one reason why it’s a good idea to shop around for an FHA lender.
Other rules for FHA loan down payments? You can get help with your down payment if that assistance come from approved sources. For example, the lender cannot gift you money for your down payment on an FHA mortgage.
Nor can the seller. These parties have a financial stake in the transaction and therefore cannot provide you with down payment assistance.
A family member, friend, employer, or even a third party agency can provide legitimate gifts of down payment funds as long as these gifts have no expectation of repayment.
If you have friends or family providing down payment help, the lender will require those funds to be properly documented and they may not come from sources like payday loans, credit card cash advances, and other non-collateralized loans.
How on earth will the lender know where the money came from? That’s a question some ask and the answer sometimes surprises these people–the lender may ask you for the bank transaction records associated with your downpayment funds to verify the sources.
If you cannot show a paper trail for the gift funds, the lender may not be able to accept them.
The best thing to do in cases like these is to hold off on accepting down payment gift funds until you can speak to the lender to ask what the right procedure is for down payment gifts–learn what the lender requires first and follow that to the letter for best results.
Down payment money has strict rules–your participating lender is the best source of information on how to accept down payment gifts, how to document them, and how to stay on the right side of the FHA loan rules in this area.
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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