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FHA Loan Down Payment Rules: Acceptable Sources

May 21, 2014

109In a recent blog post we were asked about FHA down payment requirements–is there such a thing as a “no down payment” FHA loan? Some borrowers might mistake the VA loan program’s zero down payment option for something the FHA officers, but the truth is that FHA loans require a minimum of 3.5% down for single-family home loans.

Not only that, but the money for your down payment has to be documented and come from an acceptable source.

The reason for this is twofold–it prevents borrowers from over-leveraging themselves with cash withdrawals or cash advances on credit cards (credit card cash advances can’t be used to make down payments on an FHA home loan) and it keeps people with a financial interest in the transaction from loaning money for the down payment.

According to HUD 4155.1, down payment funds may be received in the form of gifts, but the definition of gift funds by the FHA loan rulebook is very strict. Specifically:

“In order for funds to be considered a gift, there must be no expected or implied repayment of the funds to the donor by the borrower.”

Who can provide such a gift? That is also governed strictly in HUD 4155.1. “An outright gift of the cash investment is acceptable if the donor is

• the borrower’s relative
• the borrower’s employer or labor union
• a close friend with a clearly defined and documented interest in the borrower
• a charitable organization
• a governmental agency or public entity that has a program providing homeownership assistance to low-and moderate-income families, or first-time homebuyers.”

Note that the FHA does not offer such programs–you would need to check your local directories to see who may be offering homebuyer assistance programs.

Does the FHA have a list of who cannot provide gift funds? Yes. According to HUD 4155.1:

“The gift donor may not be a person or entity with an interest in the sale of the property, such as

• the seller
• the real estate agent or broker
• the builder, or
• an associated entity.

Gifts from these sources are considered inducements to purchase, and must be subtracted from the sales price.”

Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.

Joe Wallace - Staff Writer

By Joe Wallace

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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