When considering the sources of funds for down payment and closing costs, different types of lenders have different rules. Generally, mortgage lenders want borrowers to meet the down payment requirement with funds they have saved because this indicates that the borrower has the discipline to save. For this reason, some may restrict the amount of the down payment that is provided via other sources.
If you are planning on purchasing a home, please ensure that as early as possible in your process you deposit or allocate the funds for down payment. Keep in mind that lenders will try to determine the source of funds by tracing the funds back to their origins.
Conventional Loan
A conventional loan requires the borrower to verify that they have at least 5% of their own funds for the down payment.
FHA Loan
The Federal Housing Administration (FHA) allows for the entire down payment to be a gift.
Some of the more common sources which the FHA considers to be acceptable for down payment funds are cash from personal savings and checking accounts, cash saved at home, savings bonds, IRAs, 401K accounts, other investments, the proceeds from the sale of personal property, and, as previously mentioned, gifts. Gift donors are restricted primarily to a relative of the borrower, but they can also be certain organizations, such as a labor union, a governmental agency, or a non-profit organization.
Buyers are prohibited from receiving down payment money directly from sellers, but buyers can receive down payment money as gifts from nonprofit agencies. A possible approach is for the seller to contribute the down payment (plus a fee) to a nonprofit agency; then, at closing, the nonprofit agency may give the down payment to the buyer.
In any case, the giver must provide a "Gift Letter," which states that the funds are a gift to you for your down payment and that you do not have to pay it back. If you did have to pay it back, the lender would look at that as increasing your debt ratio, which may adversely affect your ability to secure a loan.
There are other programs available through non-profit agencies and/or your local, state or federal government called Down Payment Assistance (DPA) programs.
Another source for down payment assistance are grant assistance programs such as the Nehemiah program that you do not have to pay back. You can get as much as 6% of the final contract sale toward down payment or closing costs.
Many states and cities have bond programs that provide down payments for homebuyers.
If you are relocating at the request of your employer, find out if your company offers programs to assist in paying for part of the down payment and closing costs. Many large corporations offer such programs as employee benefits. Even if you work for a small company that does not have such programs in place, you may still be able to negotiate for some relocation assistance.
It is important for borrowers to understand that in addition to these rules, down payments are also governed by the FHA’s rule on closing costs. According to FHA home loan guidelines, the closing costs cannot be considered as part of the 3.5% down payment requirement. FHA Mortgagee Letter 2008-23 states, “Closing costs are not considered in the mortgage amount/down payment calculation for purchase money mortgages.”
Each type of mortgage and lender has different guidelines for what are allowable sources for down payments. Consult with your mortgage professional to discuss your down payment options in detail.
