Acceptable Sources for Down Payments on FHA Loans
The Federal Housing Administration, or FHA, guarantees mortgage loans for prospective home buyers who meet the FHA’s eligibility requirements. FHA loans can be an attractive mortgage option for many families looking to purchase their first home because they offer competitive interest rates and terms, while having greater underwriting flexibility for buyers with less than perfect credit. One of the other advantages of a FHA loan over some other conventional loan options is the amount of down payment required. Many conventional mortgage lenders will require a buyer to put down 10%-20% of the home’s sale price in cash, while the minimum required down payment for an FHA loan is just 3.5% of the sale price or the home’s appraised value, whichever is lower.
The FHA requires that the down payment be made by the buyer themselves, but there are a variety of ways to source that money. While you should ask your Realtor to discuss having the seller offer concessions such as paying some of all of the closing costs, the FHA rules prohibit the seller from supplying the prospective buyer with the down payment funds.
Where can I get my down payment money from?
The good news is there are not many restrictions on where your down payment money comes from.
Acceptable sources of funds for use as down payments include:
- Funds from a buyer’s savings or checking accounts
- Cash (buyer must explain in writing how the funds were accumulated and the amount of time it took to accumulate the funds)
- Savings bonds
- 401(k) accounts
- Stock and bonds
- Sale proceeds from sale of personal property
- Grants or acceptable loans
- Employer down payment assistance programs
- Gifts (see below)
Gifts of down payment amounts (full or partial) are common. According to the FHA guidelines, gifts of down payment amounts are acceptable if the individual gifting the funds is a relative of the borrower, the borrower’s employer or labor union, a charitable organization, or a government agency that has a program providing assistance to low and moderate income individuals and families.