Acceptable Funds Sources for Downpayment

The Minimum Required Investment (MRI) refers to the borrower’s required contribution in cash or its equivalent, which must be at least 3.5 percent of the property’s Adjusted Value. FHA guidelines strictly regulate the source of these funds. Specifically, the MRI cannot come from the seller, the builder, the real estate agent, or any other person or entity that financially benefits from the transaction, nor can it come from anyone reimbursed by these parties. This rule ensures the borrower has a legitimate financial stake in the property, although exceptions exist for assistance provided by government entities.

Yes, borrowers are permitted to use “Cash on Hand” for their down payment, but the FHA imposes rigorous verification standards. Because these funds are not held in a financial institution, the borrower must submit a detailed explanation describing how the money was accumulated and the duration of time it took to save it. The lender is required to determine if the accumulation is reasonable based on the borrower’s income, spending habits, and documented expenses. To be eligible for use at closing, these funds must eventually be verified as deposited in a financial institution or held by the escrow/title company.

FHA guidelines allow specific individuals and organizations to provide gift funds for the down payment. Acceptable donors include family members, employers, labor unions, and charitable organizations. A close friend with a documented interest in the borrower may also provide a gift. However, the donor cannot be an interested party like a real estate agent or seller. Importantly, donors cannot use “cash on hand” to fund the gift; an audit trail is required. A gift letter signed by the donor and borrower is mandatory, stating the relationship, amount, and that no repayment is expected.

Borrowers may utilize assets accumulated in retirement accounts, such as IRAs, 401(k) plans, and Keogh accounts, for their down payment. Generally, lenders may include up to 60 percent of the value of these assets, minus any outstanding loans, toward the required funds. If a borrower wishes to use more than 60 percent of the account’s value, they must provide conclusive evidence that a higher percentage can be withdrawn after accounting for federal income taxes and withdrawal penalties. The lender will verify the account’s existence and withdrawal eligibility using the most recent monthly or quarterly statement.

Yes, federal, state, or local government agencies and “Instrumentalities of Government” can provide secondary financing (a second mortgage) to help borrowers meet the Minimum Required Investment (MRI). This financing must be disclosed at the time of application and cannot result in cash back to the borrower. The lender must document that the government entity incurred a legally enforceable obligation to provide the funds. Unlike other sources, there is no maximum Combined Loan-to-Value (CLTV) limit for secondary financing provided by these specific governmental entities, provided the liens are subordinate.

No, the seller is strictly prohibited from contributing funds to satisfy the borrower’s Minimum Required Investment (MRI), or down payment. While sellers and other interested parties can contribute up to 6 percent of the sales price toward the borrower’s closing costs, origination fees, and prepaid items, they cannot fund the MRI directly or indirectly. Any contribution exceeding the 6 percent limit, or used for ineligible items, is considered an “Inducement to Purchase.” This results in a dollar-for-dollar reduction of the purchase price for loan calculation purposes, effectively preventing those funds from counting toward the down payment.

Borrowers generally cannot use unsecured loans, such as credit card cash advances or signature loans, for the down payment. However, “Collateralized Loans” are acceptable if they are fully secured by the borrower’s own financial assets, such as investment accounts or certificates of deposit. The lender must verify the existence of the assets securing the loan and confirm the loan terms. Crucially, the loan must come from an independent third party and cannot be provided by the seller, builder, or real estate agent. Repayment of these secured loans is generally not counted in debt ratios.

Yes, proceeds from the sale of personal property are an acceptable source of funds. To use this source, the borrower must provide a satisfactory estimate of the item’s value, such as a page from a published value guide or a written appraisal by a qualified third party. The lender will use the lesser of the estimated value or the actual sales price for qualification. The transaction must be fully documented with a bill of sale, evidence that the borrower received the funds, and proof that the proceeds were deposited into the borrower’s bank account.

“Sweat Equity,” which refers to the value of labor performed or materials furnished by the borrower before closing, is an acceptable source for the down payment. The lender must verify that the work will be completed in a satisfactory manner and obtain evidence of the contributory value of the labor, typically through an appraiser’s estimate. While the borrower can be credited for the value of their labor and any materials they purchased, they cannot receive cash back from the transaction. Any work completed must be on the specific property being purchased.

Rent credits are a viable source for the down payment when a borrower rents a property with an option to purchase. However, the entire rent payment does not count; only the cumulative amount of rental payments that exceeds the appraiser’s estimate of fair market rent is eligible. To utilize this, the lender requires the valid rent-with-option-to-purchase agreement, evidence of the rental payments made, and the appraiser’s estimate of market rent. This calculation determines the “extra” portion of rent that serves as the allowable credit toward the Minimum Required Investment.