The Federal Housing Administration (FHA) recently altered its guidelines as a result of the Economic and Housing Recovery Act of 2008. One significant change was the elimination of the seller-funded down payment assistance program. Often used by builders through non-profit organizations such as Nehemiah and Ameridream, this program enabled the seller of a property (either an individual or a builder) to "donate" an amount equal to the funds needed by a buyer for a down payment on a home when securing FHA financing.
As of Oct. 1 of this year, the FHA will no longer allow seller assisted down payments. Not only that, but the FHA actually increased the down payment requirement from 3 percent to 3.5 percentâ€"a setback for those who want an FHA loan and are already having problems saving enough money to close on a home.
Fortunately, there is another financing option that can bring these folks a little closer to home: family loans. This feature is unique to FHA. And while it‘s not permissible for buyers to borrow the down payment from individuals when securing any other type of mortgage, FHA's guidelines allow buyers to borrow from family members. But to obtain a family loan, borrowers must keep some specific requirements in mind:
- The family member making the loan can be a parent, grandparent, son, daughter, stepson or stepdaughter, or a legally adopted child or foster child.
- The term of the loan cannot be less than five years.
- The FHA loan and family loan combined cannot be greater than 100 percent of the value of the home.
- The scheduled loan payments, if any,must be factored into the buyer's debt ratios.
- Funds cannot be directly or indirectly associated with the seller, or anyone in the transaction who has a financial interest in the sale.
Now let's combine the family loan with another advantage afforded by the Housing and Recovery Act of 2008: the $7,500 tax credit. If Grandpa is a likely candidate to supply a family loan, then he might want to know how he would get paid back. If the buyers are first timers and qualify for the tax credit, then Grandpa could get repaid come tax time.
Remember that lenders will want to verify the source of all funds to close the transaction, so be prepared to provide a copy of the loan agreement that spells out the terms and verifies that Grandpa has sufficient funds available to make the loan.
Sometimes when a window closes, another one opens, So while the recent Housing Recovery Act of 2008 has put the squeeze on the seller-funded down payment assistance program, a family loan can provide another avenue to closing on a home.
Written by David Reed, Texas-based mortgage banker with more than 20 years experience