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FHA downpayment 101-rules to live by

By
Mortgage and Lending with New American Funding NMLS 6606 310298

 

First Time and FHA buyers have always had down payment as their biggest hurdle to homeownership. As recently as last year we had seller funded down payment assistance that often bridged that gap but it seems pretty clear that option may not come back. So what can we do to get to the magic 3.5% needed by FHA when our buyers haven't saved it? The HUD Housing Handbook 4155 is our bible to reference this information. Let's start with the basics.

Of course the funds can come from the borrower as long as they have been seasoned. That means we need to know where they came from and that they did not come from unacceptable sources. Credit card cash advances and unsecured loans are the usual suspects, but any untraceable cash deposits will fall under this heading. It should be said here that once you can provide two months worth of bank statements showing the funds in the account holder's name the funds are considered seasoned (this applies to stock, mutual fund, 401k and IRA accounts as well). But say we don't have any seasoned funds and our buyer needs to buy now, what do we do?

The common answer is a gift from a family member. Documenting the gift is a must but we'll save that for later. The 4155 has this to say about gifts:

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 charitable organization, a governmental agency or public entity that has a program to provide homeownership assistance to low- and moderate-income families or first-time homebuyers, or a close friend with a clearly defined and documented interest in the borrower.  The gift donor may not be a person or entity with an interest in the sale of the property, such as the seller, real estate agent or broker, builder, or any entity associated with them.

All of the funds a buyer needs to contribute to the deal can come from any of these sources as well:

-Public down payment assistance funds- either loans or grants

-Loan from a family member (Yes Realtor's can gift or loan their commission to assist family members)

-Secured borrowed funds (by refinancing a car that may be paid off or a 401k loan)

-Sale of personal property, as long as the value can be documented

-Employer bonus or assistance plans (cannot be a salary advance!)

-Commission from the sale if the buyer is a Realtor

-Tax refunds (just in time for the Spring buying season!)

-Disaster relief grants and loans

-Savings Clubs and Church groups

A few other sources are more difficult but good to know such as:

-Rent credits in a Lease/Option (Only the amount above what is considered "fair market rent")

-Sweat Equity, including labor and materials (can also be gifted to the buyer)

-Cash saved at home (requires a host of "reasonableness" tests)

-Bridal Registry accounts

So as you can see, there are still quite a few alternatives for buyers to come up with the funds needed to close. The trick, as always, is to be familiar with the latitude available and to know precisely how to document your transaction. I must say historically if my buyer credit and income qualified for an FHA loan, the issue of cash to close was usually resolved in one of the ways mentioned.

Also don't forget with the new tax rebate for first time buyers, family members may be more apt to issue a loan that can be paid from those proceeds. It's an angle I've been pursuing with success already.

Your loan will always be only as good as your lender so partner with an experienced and knowledgeable lender to make sure you get the best deal!

Gerry Suarez, Jr.

Your FHA Loan Pro

 

Comments (10)

Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Gerry... not sure how this got missed, but you bring up some other great sources that aren't talked about much. Another on to mention is a loan from your employer also. You said assistance plans, and I am not sure if you meant the same.  thanks

Jeff Belonger

Feb 21, 2009 11:44 AM
Gerry Suarez Jr.
New American Funding NMLS 6606 - Orlando, FL
FL Mortgage Guru

Jeff-Yea that's what I meant by the "employer assistance" but it deserves to be mentioned even more so thanks for bringing it up. I must say I've used that trick before and it's a great, yet little talked about way to bridge the down payment gap. I realize a list like this can't be all encompassing though so please feel free to add to it!

Gerry Suarez, Jr.

Your FHA Loan Pro!

Feb 23, 2009 11:30 AM
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Gerry - Something else that can be done to take advantage of the tax credit now is for the borrower to tweak their W4 withholding deductions so that they can take home more money in a short period of time.

However, having said that, they will definitely need to speak to a tax specialist before doing that so that they don't get into trouble by tweaking it too much.

Feb 23, 2009 01:35 PM
Gerry Suarez Jr.
New American Funding NMLS 6606 - Orlando, FL
FL Mortgage Guru

great suggestion Donne! There are so many ways to help accelerate the flow of funds to buyers, if we only open our eyes. Jeff wrote a very good blog about gifts or family loans with repayment tied to the tax credit that could work wonders right now. Hopefully he will post a link to that here.

Thanks for the comment!

Gerry Suarez, Jr.

Your FHA Loan Pro!

Feb 23, 2009 02:48 PM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Larry & Donne....  here is that one post that I did talking about the tax withholdings....

7500 Tax Credit - First time homebuyers Tax Credit - How to use it before you actually buy your home....

and more about the tax credit & possibilities..

Use a 6 month gift from a relative to buy a home, thanks to the Tax Credit

Jeff Belonger

Feb 23, 2009 03:07 PM
Jay Williams
Greenville, NC - Greenville, NC
Mortgage Loan Officer - Getting You The Right Loan

Gerry, I think we would all agree if you can get the customer beyond credit and debt to income the issue will come down to cash for closing. On the other hand if you have cash you can cover alot of credit and debt to income. Not as many of that group, however.

Good information!

Jay

Feb 24, 2009 10:03 PM
Gerry Suarez Jr.
New American Funding NMLS 6606 - Orlando, FL
FL Mortgage Guru

Jay-and the point I'm trying to emphasize is that once you can overcome credit and DTI, the cash to close issue shouldn't be an issue. With this many ways and more, cash to close shouldn't be the deciding factor. Thanks for commenting!

Gerry Suarez, Jr.

Your FHA Loan Pro!

Feb 25, 2009 12:22 AM
Maya Thomas, Broker
Tampa, FL
Please see my client recommendations.

FANTASTIC information!  Thanks so much for the ideas!

Mar 05, 2009 08:33 AM
Gerry Suarez Jr.
New American Funding NMLS 6606 - Orlando, FL
FL Mortgage Guru

Maya- Don't forget the FHA loan limits recently increased to $729,750 in your market. That should cover a bit more property than it used to! Thanks so much for the kind comment!

Gerry Suarez, Jr.

Your FHA Loan Pro!

Mar 05, 2009 09:02 AM
Kevin Tinsley
VAHomeLoans.com - Tacoma, WA
Washington State Tacoma Seattle VA Home Loans

Gerry,

Thanks for the information! 

I have one right now that the employer is willing to gift the money for the downpayment.  Assume the documentation requirements ie gift letter, proof of tranfer etc are similar to that of a relative gift?

Sep 30, 2009 05:32 AM