Down payment issues may vary for any home loan, whether it is an FHA loan, a VA mortgage, or a USDA construction loan. But there are some things all mortgages have in common where down payment money is concerned. The earlier you know these issues, the better.

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Avoid These Down Payment Mistakes for Your FHA Loan

September 20, 2023

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Down payment issues may vary for any home loan, whether it is an FHA loan, a VA mortgage, or a USDA construction loan. But there are some things all mortgages have in common where down payment money is concerned.

The earlier you know these issues, the better. You can better anticipate your mortgage costs, including down payment and closing expenses if you know what’s required of your down payment. That might sound a bit mysterious...at first.

Don’t Assume Anything About Your Down Payment

Some wrongly assume the down payment requirement can be offset by closing costs, as if paying for those in cash rather than financing them would be counted as part of your FHA loan down payment. This will not happen.

Ask your loan officer about the bank’s procedures for accepting the down payment money, where it can come from, and how long you must have those funds in your account before they can be used for the down payment. Some either make bad assumptions about this issue or they don’t think to ask.

Don’t be one of them.

Don’t Assume any Money Is Good Money for Your Down Payment

FHA loan down payment funds must be properly sourced and verified for your lender. You will be asked about the sources of your cash, how long you have had it, and whether it comes from sources your lender can’t allow. What does that mean?

Basically, you can’t get down payment gift money from people who have a financial interest in the transaction. The seller can help you pay a percentage of closing costs. But the seller is prohibited from giving you money for your down payment.

The seller has an obvious stake in the outcome of the loan. So does your lender, which is why your lender won’t offer you a down payment loan for the FHA mortgage down payment.

Other Unapproved Sources

People with a stake in the sale aren’t the only prohibited sources for FHA loan down payments. You can’t get a credit card cash advance to pay for it, either. The lender won’t take those funds, nor will the lender accept money from pink slip or payday loans, and similar loan products.

Don’t Take Down Payment Gifts Without a Paper Trail

Your lender will accept gift funds from family, friends, and employers who provide you with down payment money IF those funds are accompanied by a letter explaining that the money does not come from unapproved sources mentioned above.

That letter must explain where the money DID come from (cash saved at home, cashed-in investments, from checking accounts or money market accounts or similar sources) and how long it’s been in the gift giver’s account.

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