Who Offers Down Payment Assistance for FHA Loans?

July 4, 2019

Saving for your down payment is a big part of the home buying process and this can be daunting for some borrowers. FHA loan rules permit down payment help that meets FHA and lender requirements. You can get down payment gift fund help from a state agency or other government program, parents, and employers.

None of these programs is centrally coordinated; the rules and requirements will vary depending on state law and other factors.

Down payment assistance is a popular topic-borrowers applying for any kind of mortgage want to save as much as possible up front and down payment assistance is one way to do that. But who is providing this assistance and what are the rules?

The rules for FHA home loan down payments are found in HUD 4000.1, which is the FHA Single Family Home Loan Handbook. These rules include a basic prohibition for down payment assistance from anyone who has a financial stake in the outcome of the loan-no seller, lender, or other party to the loan process is allowed to provide down payment gift funds to the buyer.

The rules also say that even for those who ARE permitted to provide down payment help, the funds themselves must be sourced according to FHA loan standards. When you get a down payment gift or apply for down payment assistance from a local agency, the money they provide cannot come from non-collateralized loans or other unapproved sources.

And the lender is required to check.

But there is another question at this stage that is often on the minds of an FHA borrower-who can I ask for down payment assistance? Does the FHA offer any such help?

Unfortunately the FHA does NOT offer down payment assistance. In the same way that the FHA does not lend money to the borrower, who is required to apply for the loan via a participating 
FHA lender, FHA operations do not include down payment assistance. This must be found at the local level.

State, city, or private organizations may offer down payment assistance programs and these programs will vary depending on location, state law, and other factors.

Any agency that offers you down payment assistance in the form of gift funds cannot make such help a “hidden loan” to the borrower with an expectation of repayment. Gift fund must be exactly that-gifts that are not paid back.

Private individuals are permitted to make down payment gifts to the borrower, too. Parents, other family members, employers, and others may contribute under the same basic rules. The gift giver is required to show how the money is source-no payday loans, pink slip loans, credit card cash advances, and no funds that cannot be properly traced.

Many of these issues are commonly discussed in mortgage lending circles, but one thing that is not as talked about is the general prohibition of cash back to the borrower at closing time. The borrower cannot “profit” from an FHA home loan in the form of money back at closing time in excess of $500 or from things that are not genuine refunds of money paid up front for things later financed into the loan.

So the borrower must understand that down payment assistance must be exactly that-the money paid up front by the borrower or via gift funds or down payment help cannot be applied anywhere except for the down payment. As mentioned above, the seller is not permitted to contribute money to the down payment but they ARE permitted to pay up to six percent of the asking price in closing costs which can free up the borrower’s money in that area for other purposes.

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