FHA Allowable Down Payment “Loan” Options In Place of Discontinued Down Payment Assistance Programs

Posted at 3:13 AM, Aug. 25, 2008

The (FHA) recently changed its guidelines in response to the Economic and Housing Recovery Act of 2008. A very significant change of the Act was the elimination of the seller-funded down payment assistance program. This option was often used by builders and other willing sellers through non-profit organizations such as Nehemiah and AmeriDream, this program enabled the seller of a property (either an individual or a builder) to “donate” an amount equal to the funds needed by a buyer for a down payment on a home when securing FHA financing.

Effective October 1, 2008, the FHA will no longer allow sell assited down payments.  Not only that, but FHA has actually increased the down payment requirement from 3% to 3.5% which could be a real setback for those who want an FHA loan and are already having problems coming up with the money to save to close on a home. 

Fortunately, these is another option that can bring these buyers a little closer to home:  "family" loans.  This feature is unique to FHA, and while it is not allowable on other types of loans, it IS for FHA, and allows buyers to borrow the down payment from family members. But to obtain a family loan, there are specific requirements:    1) the family member can be a aprent, grandparent, son, daughter, stepson, stepdaughter, or a legally adopted child or foster child. 2) The term of the loan cannot be less than 5 years (although it CAN be paid back in les than 5 years). 3) The FHA loan and family loan combined cannot be greater than 100% of the value of the home. 4) The scheduled loan payments, if any, must be factored into the borrower's debt ratios. 5) Funds cannot be directlly or indirectly be associated with the seller or anyone in the transaction who has a financial interest in the sale.

Of course, the lender will still want to verify the source of all funds to close the transaction, so be prepared to provide a copy of the loan agreement that spells out the terms and verifies that the relative has sufficient funds available to make the loan.