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         How much money do I need for a FHA Loan           

Currently FHA loan down payment rules require the borrower's cash investment in the property must equal a minimum of Three and One Half Percent (3.5%). All FHA loan funds must be verified from acceptable sources. If you do not have a down payment saved, please see the section on "Where to Get Down Payment Money".

Beginning January 1, 2009 The Housing and Economic Recovery Act of 2008 revised the National Housing Act to:

  • Require that the FHA borrower "shall have paid, in cash or its equivalent...and amount equal to not less than 3.5% of the appraised value of the property..."

  • Eliminate the variable FHA loan to value limits that were based on the combination of the property and the average closing cost of the State where the property is located (also know as the "downpayment simplification"); and

  • Limit the total FHA insured first mortgage to 100 percent of the appraised value, and require the inclusion of the upfront mortgage insurance premium (UFMIP) to be within that limit. 

Understanding where you can get money for your down payment will help you when your are ready to apply for your FHA loan.

Acceptable sources of these funds include:

Earnest Money Deposit:  If the amount of the earnest money deposit exceeds 2% of the sales price or appears excessive based on the borrower's history of accumulating savings, the deposit amount and source of funds must be verified.  Otherwise, satisfactory documentation includes a copy of the borrower's canceled check or verification from the bank.

Savings and Checking Accounts:  The lender must verify these accounts.  The borrower will need to provide the last three most recent bank statements.  If a large increase in deposits is present or the account was recently opened, an explanation and verification of the source of the deposit must be established.  Non-sufficient funds, bounced checks, or account overdrafts will need to be reasonably explained.

Closing Cost: Effective January 1, 2009, closing cost may not be used to help meet the minimum 3.5% downpayment requirements.  Closing cost are not considered in the mortgage amount/downpayment calculation for purchase money mortgages.

Gift Funds:  An outright gift is acceptable if it is from:

1) a relative of the borrower,

2) the borrower's employer or labor union,

3) a charitable organization, or

4) a governmental agency or public entity that has a program established to provide homeownership assistance to low and moderate income families. 

No repayment of the gift may be expected or implied.  Furthermore, a gift letter signed by both the donor and the borrower stating the amount of the gift and that repayment is not required, provides the donor's name, address, phone number, and relationship to the borrower will be required.  In addition, verification of the transfer of funds from the donor's account to the borrower's account, via copies of the donor's canceled check, for example, and the borrower's deposit slip or bank statement will be necessary.

Sales Proceeds:  Sale of an asset is considered an acceptable source of income if the borrower provides:

1) copy of the bill of sale or HUD-1 Settlement Statement (for the sale of a home),

2) copy of the check or verification of funds transfer from the buyer of the asset to the borrower, and

3) copy of the borrower's deposit slip or bank statement showing the deposit of the funds into the borrower's bank account.

Cash Saved at Home (i.e. Mattress Money):  Cash must first be deposited in a financial institution or held by the escrow/closing agent.  The borrower must provide an explanation of how the funds were accumulated and the length of time taken to do so.  The lender must determine the credibility of the savings based on the borrower's income, spending habits, and history of using financial institutions, as well as considering how long it took to accumulate the funds.

Rent Credit:  If the portion of a borrower's current rental payment is to be used to purchase the property the borrower currently occupies, the borrower will need to provide a copy of the rental/lease agreement showing an option to purchase with the clause stating how much of the rental payment is to be used as a rent credit.  It is the lender's responsibility to show that the rent payment is above FHA's estimate of fair market rent.  If the rent paid by the borrower is less than fair market or if the seller has agreed to permit the borrower to occupy the property rent-free, this amount must be deducted from the sales price as a sales concession before determining the borrower's maximum insurable FHA loan amount.

Seller/Lender/Realtor Credits: In a purchase transaction you will not only have your required down payment, but you will also have closing costs that need to get paid. To limit the total amount of funds that the borrower needs to bring to the table, the seller/lender or Realtor can agree to pay all or a portion of the borrowers closing cost. The combination of the seller/lender/Realtor credits may not exceed 6% of the purchase price for the borrower points, discounts, closing cost and/or prepaid items. The six percent is in total and not per entity. Neither of these parties may contribute any money towards the buyer’s required 3% down payment.


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