Some FHA Loan Down Payment Issues

October 20, 2023

When you buy a home with an FHA mortgage, you need to provide a down payment or have one provided for you via approved sources, such as a local down payment assistance program that meets FHA standards or money from friends and family. 

But you can’t simply accept a down payment gift, go to your closing date, and pay the money. FHA loan rules, like many other home loan programs, have sourcing requirements and other rules that govern the down payment.

Why Down Payments Are So Regulated

Your down payment is regulated by federal law to prevent a lender or seller from taking advantage of you, the borrower. That’s why the seller can never help you directly with a down payment and why the lender can’t, either.

And when it comes to the source of your down payment money, the FHA wants to know you didn’t get on a “hamster wheel” of debt to make your down payment, which is why you can’t use a payday loan or credit card cash advance to make your minimum 3.5% FHA home loan down payment.

Down Payment Issues You Should Know:

The lender will require documentation from all non-borrower sources of funds the same way they require documentation from borrower-sourced down payment money. 

The credit agency Experian notes on its official site, “Lenders require seasoning of large portions of your down payment to avoid potential fraud and the use of funds from criminal activities to make home purchases.”

But that is not all. Your lender may require the money to be “seasoned,” which typically means resting in your bank account for 60 days or more. Your lender needs to know you can realistically afford the loan, not simply tread water financially in hopes that more money will come along eventually.

Seasoned Money

If you have money in your account older than 60 days, your lender may not be as strict about providing a sourcing letter as they will when you get a large lump sum in your account a mere six weeks before the closing date.

Experian says, “If a large sum suddenly appears in your bank account as they're making an evaluation, the lender will need to understand its origin.”

Furthermore, “If gift money isn't in your possession long enough to be seasoned,” the lender requires a gift letter “typically signed by both the gift giver and you as the recipient and states there is no expectation of repayment.”

Why Declare Gift Status?

Any down payment help listed as a loan must be added to the borrower’s debt-to-income ratio, which could change the calculations for loan approval. Borrowers already worried they carry too much debt won’t want a down payment loan.

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