There are so many ways to settle the down payment requirement without resorting to predatory lending and being burdened by sky-level interests. Sometimes you just need to pool your resources and start reading.
What’s an FHA Down Payment
Historically, the Federal Housing Administration or FHA was formed in the wake of the Great Depression where thousands were left unemployed leading to the foreclosure of their homes. The FHA became an insurer of mortgage loans for borrowers with modest means.
The FHA, which was formed under the National Housing Act of 1934, requires borrowers to make a down payment of at least 3.5 percent of the sales price or the property appraised value, whichever is lower. This comes as a better deal contrasted with loans not insured by the FHA with higher upfront costs.
More importantly, the FHA has approved a long list of sources of funds for borrowers to get their down payment. A down payment could even be given as a gift to the borrower!
Sourcing FHA Down Payment Funds
Cash and Deposits
The FHA lists down the following as acceptable sources of funds:
- Savings and checking accounts: Borrowers are to present the latest bank statement, together with a verification of deposit (VOD), to verify the accounts.
- Earnest money deposit: The lender is obliged to document as well as verify the amount of the deposit and the source of the funds if the amount exceeds 2 percent of the asking price or seems to be excessive relative to the borrower’s history of accumulated savings.
- Cash saved at home: The borrower must adequately demonstrate in writing how the funds were accumulated and the time it took to accumulate such funds.
- Cash accumulated with private savings club: The borrower must adequately document and demonstrate the accumulation of money with his/her private savings club, subject to the lender’s re-verification of the information.
- Retirement Accounts: Borrowers can use up to 60% of the asset value of their retirement accounts and savings plans to fund the down payment, subject to relevant fees and taxes.
- Stocks and Bonds: The lender will look into the statements of a borrower’s portfolio to verify his/her stock holdings and his/her actual receipt of the funds.
- Savings Bonds: Government-issued bonds are taken at their original purchase price provided that redemption eligibility and value is confirmed.
Gift funds allow individuals or entities other than the borrowers to pay the down payment requirement. Gift funds are not to be repaid and this should be explicitly stated in the accompanying gift letter documentation.
Donors can be relatives, employers, labor unions or even close friends for as long as they have a documented and defined interest in the borrower. Governmental agencies or public entities that have a home assistance program for first-time buyers and families with low and moderate incomes are also allowed.
However, a party or entity involved in the sale transaction such as the seller, the real estate agent or broker, the builder or any related entity is precluded from becoming donors.
Proceeds from Personal or Real Property
Borrowers may fund the down payment by selling personal items like cars, stamps, coins, recreational vehicles or baseball card collections. An estimate of the value of those items, as well as evidence to show that those items were sold, is required.
The net proceeds from the sale of real property may also be used and the borrower will submit an HUD-1 Settlement Statement as evidence of the sales proceeds.
Other accepted property-related sources of funds include real estate commission from the sale of the subject property, trade equity, rent credit, and sweat equity
Loans and Grants
Borrowers can take out loans to provide for the down payment but these loans should be fully secured by assets like stocks, bonds and real property other than the property subject to the sale. Moreover, parties that have an interest in the sale are not permitted to provide such loans.
The FHA does not allow cash advances on credit cards, unsecured signature loans, borrowing against furniture and household goods, and other unsecured financing types.
The FHLB ( Federal Home Loan Bank) also offers a down payment assistance program that can be used to fund the minimum cash investment requirement.
Acceptable sources of funds can come from employer assistance plans and relocation guaranteed purchase, subject to further documentation. Notably, a salary advance is considered an unsecured loan and cannot be considered as assets to close.
Call a Lender Now
We have outlined your options in order to start funding your down payment to get your home purchase moving. If you still have concerns and want more details about any of the above items, you can talk to a lender that will surely shed light on your doubts and open your mind to the best possible solution.