A reader got in touch this week about a question related to down payment assistance for FHA mortgages. “I’m buying a home for 175,000. I’ve been cleared to close. Ive been approved for $30,000 down payment assistance which has covered all my down/closing fees.”
“A day before closing the FHA is saying I still need to pay 3.5% of the purchase. Is it still required? I thought with FHA at least $1000 earnest money was enough. I had $30,000 already approved.”
Answering this question is difficult for two reasons-we don’t know the specifics of the gift funds, and whether those funds were actually considered down payment assistance or contributions toward closing costs.
There is a big difference between down payment assistance funds, and funds contributed to closing costs. FHA loan rules in HUD 4000.1 state that money paid for closing costs cannot be counted toward or consider part of a borrower’s minimum required investment (the down payment).
So if the gift funds provided to the borrower went towards closing costs, they would not be considered “down payment assistance”.
Contributions toward the closing costs of an FHA mortgage are capped at six percent. Anything above this is considered an “inducement to purchase” and the actual amount of the FHA loan must be reduced dollar-for-dollar for any amount above the six percent limit.
Contributions towards a borrower’s FHA loan down payment require strict verification by the lender, and there are specific rules governing the source, disposition, and use of gift funds intended as money down. All such gifts must come from an approved source, and must be a genuine gift with no expectation of repayment.
FHA loan rules have standards for earnest money, closing costs, and down payments. But lender standards, state law, and other rules may also apply in addition to FHA loan requirements.
Borrowers will need to discuss the specifics of these requirements with the lender to see what may be applicable. Borrowers should know the specifics of any contributions toward closing costs, whether or not those funds are applied to the cash requirements to close or if the money is considered a bona fide down payment assistance gift.
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