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