Home Loan Down Payment Rules and Why They Matter

May 20, 2021

The home loan down payment is a source of worry for some borrowers--it takes time to save for a down payment, plus closing costs, plus the home inspection, etc. Buying a home takes time and money and some want to turn to quicker means to come up with a down payment.
For some, that includes considering payday loans, credit card cash advances, or other sources for a larger sum of money that can be used for a down payment.

Down Payment Sources Count

There’s just one problem--FHA home loan rules in HUD 4000.1 say that for any type of FHA loan that requires a down payment--a new purchase loan, an FHA One-Time Close construction mortgage, etc.--has strict rules about the sourcing of down payment money and certain sources cannot be used.

What Kind of Down Payment Sources Are Prohibited?

Those prohibited sources include pink slip loans, payday loans, credit card cash advances, or other types of loan known in the mortgage loan industry as “non-collateralized loans”. 
These are loans that are not guaranteed by real property or other collateral (hence the name). Your lender is specifically tasked with making sure these loans and cash advances are never used for a down payment.

Why Using These Sources Is a Bad Idea

Your lender won’t allow you to make a down payment with the sources named above, and it’s a bad idea to consider them even if they WERE permitted. Why?

Payday loans and pink slip loans are extremely high-cost loan products that generally have a bad reputation for being predatory.

The Consumer Financial Protection Bureau reports payday loans can cost as much as $15 per $100 loaned, and that may be before late fees and other add-on charges. If you are having trouble affording a down payment, it’s a bad idea to consider a payday loan for such a high dollar amount--your debt trouble in such cases may only be just getting started.

Credit card cash advances are not in the same league as payday loans, but the interest rates can be higher than you might expect.
 
Cash advances cost more and overall there are better ways to come up with down payment funds than this option--your lender might not be thinking about that when enforcing the prohibition on using cash advances as part of the down payment, but in the end not using a credit card cash advance is a benefit to the borrower. You can explore down payment assistance program options if you need financial assistance with your minimum required investment for the FHA mortgage.