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Many financial writers and industry professionals urge new house hunters to start working on credit, good payment habits and other loan prep activities at least 12 months before turning in an application for the FHA mortgage.

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What You Need to Know About Your FHA Down Payment

July 6, 2015 - There is a lot of good advice for new FHA loan applicants out there. Many financial writers and industry professionals urge new house hunters to start working on credit, good payment habits and other loan prep activities at least 12 months before turning in an application for the FHA mortgage. Why?

One part of the picture--the one you likely read the most about in all the real estate and financial advice blogs--is so that a borrower can pull his or her credit reports and make sure the data is correct. Another reason to start so early is to make certain you have a minimum of 12 months without missing any payments on any of your financial obligations.

You will also read that it’s a very good idea to avoid applying for any kind of new credit for the 12 months leading up to the loan application for the FHA mortgage. Why?

More credit can potentially lead to a higher debt to income ratio, which can definitely work against the borrower, especially in cases where the debt to income ratio is already marginal. How much closer to the FHA limit do you get if you start using the new credit card you’ve got your eye on? That is a very important factor---those who have high levels of ongoing debt and not enough income to cover them and the mortgage risk having their FHA loan application turned down.

In addition to all the above, another important reason to avoid running up new debt in the short term leading up to the loan application has to do with scrutiny over your down payment.
According to the FHA loan rules published in HUD 4155.1, your loan officer has to check the sources of your down payment funds. That is because your down payment must come only from FHA-approved sources such as your savings account, money saved at home, investments you have cashed in, etc.

Your down payment may not come from what the FHA terms “non collateralized debt” sources like cash advances on credit cards or non-collateralized personal loans. According to HUD 4155.1 Chapter Four:

“Lenders must determine the purpose of any recent debts, as the borrower may have incurred the indebtedness to obtain the required cash investment. A borrower must provide a satisfactory explanation for any significant debt that is shown on the credit report but not listed on the loan application. Written explanation is required for all inquiries shown on the credit report for the last 90 days.”

The steps in verifying your down payment include the following actions taken by the lender, who must:
  • “Verify the actual monthly payment amount of any undisclosed indebtedness.
  • Include the monthly payment amount and resubmit the loan if the liability is greater than $100 per month.
  • Determine that any funds borrowed were not/will not be used for the borrower’s cash investment in the transaction.”
The last line is the key--your lender will need documentation of any credit taken out in conjunction with your FHA loan application (again, NOT recommended) to insure that such credit is not used to furnish your down payment if that source of funds is unacceptable.