The New FHA: What You May Not Know About Down Payments

With the tide shifting back toward old-school underwriting, source of down payment is once again becoming an issue. Conventional loans often require that the borrower have 5% of their own funds, and that money must be “seasoned”.

FHA is different and far more flexible.

Did you know that FHA loans do not require that the borrower have any of their own money? And there are no “reserves” required. Here are a few acceptable and interesting sources for an FHA down payment:

1. Gift funds, from a blood relative or charitable organization. The donor must sign a standard industry Gift Letter stating that no repayment is required, and you must prove the donor’s ability to gift funds. In other words, plan on getting a bank statement from the donor showing those funds available. The donor can borrow the money against as asset, but plan to show that. In the past I was even able to use gifts from non-blood relatives when there was a documentable family-type relationship between the donor and the borrower. Not sure if that will work today.
2. Down Payment Assistance program such as FHA Access, Nehemiah, or innumerable local and state bond programs. These are grants or 2nd loans that provide down payment and closing costs, but they may create additional payments or have strings attached.
3. Sale of an asset such as a car or boat. In the past I’ve had clients who sold livestock and tack. The thing to remember is that everything must be documented. That means a pink slip, Bill of Sale, 3rd party valuation, copy of the check, and the deposit receipt showing the money going into the borrower’s account. Miss a step and you may be in trouble.
4. “Mattress money” can be used if the borrower provides a detailed monthly income and expense summary showing how that money was accumulated. The money must ultimately go into a bank account on its way to the title company at close of escrow. Is your borrower off the grid, unplugged from the Matrix. Well plug back in. No bank account, no loan.
5. Bridal Registry funds. Yeah, no kidding. Newlyweds can use funds accumulated in their bridal registry, presumably without gift letters. Think about that!

So there is an update on acceptable sources of down payment for FHA. If Congress raises the FHA limit to $417k from $362,790 (in the Sacramento area), plan to do a lot more of these. It pays to know this stuff when you’re talking to first time buyers.

Is your lender approved to do FHA loans? Do they understand FHA loans? Are they keeping you informed?

I’ve been a lender for 18 years and I have done a ton of these.

Got a question? Give me a call or send me an email.

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