With only a 3.5% minimum down payment requirement, FHA Mortgage programs are being used by more Las Vegas First-Time Home Buyers.
Some people easily get down payment and equity confused, especially in a market like Las Vegas which has a significant number of undervalued bank owned and foreclosure deals.
However, on a purchase transaction, the FHA clearly defines that the minimum down payment needs to be 3.5% of the lesser of the appraised value or the sales price.
Keep in mind that the down payment does not include borrower-paid closing costs, pre-paid taxes, insurance, title, appraisal, and home inspection fees.
To be approved for an FHA loan, all sources of funds have to be properly documented and verified by an underwriter who will be looking to see if there were any undocumented debts incurred by the borrower to obtain the FHA down payment cash investment.
Acceptable sources of borrower funds include the following:
- Earnest Money Deposit
- Savings and Checking Accounts
- Cash saved at home
- Private savings club
- Savings Bonds
- 401 (k) and Keogh Accounts
- Stocks and Bonds
- Thrift Savings Plans
- Gift Funds
- Sales Proceeds
- Sale of personal property
- Commissions from sale
- Trade Equity
- Rent Credit
- Sweat Equity
- Collateralized Loans
- Disaster Relief Grants and Loans
- Employer’s Guarantee Plans
- Employer Assistance Plans
Questions About Sourcing FHA Down Payment Funds:
Q: How is the Earnest Money Deposit verified?
The EMD is the initial deposit submitted with an accepted purchase contract offer which is held in an escrow account. These funds count towards the borrower’s down payment and/or closing costs.
The EMD is verified by a cancelled check, certification from the deposit-holder acknowledging receipt of funds, or separate evidence of the source of funds.
*If the EMD exceeds 2% of the sales price or appears to be excessive based on the borrower’s history of savings, there may be more documentation required to source and document the money trail.
Q: How are Savings and Checking Accounts verified?
A verification of deposit (VOD), along with the most recent bank statement is one way a lender may request to verify these funds. If there is a significant increase in an account, or the account was recently opened, a written letter of explanation may be required as well.
Q: What if I have been saving money in a jar or under the mattress?
The borrower will need to provide a written letter of explanation and evidence of the ability to accumulate the cash. This can include analyzing a borrower’s income stream, the time period which the funds were saved, spending habits, documented expenses, and a history of using financial institutions.
Q: How is a down payment documented from a 401 (k) or IRA?
While liquidation of the account is not required, underwriters will only use up to 60% of the value of the assets, unless the borrower can prove that a higher percentage an be withdrawn after subtracting any Federal income tax and penalties.
Q: Do I have to show liquidation of funds from Stocks or Bonds?
No, you may not have to show actual liquidation of funds from a Stock or Bond, but the accounts will be verified by providing monthly or quarterly statements.
Q: Who can give a Gift Fund?
A gift fund can be considered as an acceptable source of down payment as long as there is no expected of implied terms of repayment to the donor by the borrower.
Gift funds can be given by the following:
- A relative
- Borrower’s employer or labor union
- A charitable organization
- A government agency or public entity that has a home ownership program
- A close friend with a clearly defined and documented interest in the borrower
As a general rule, the FHA is not concerned with how the donor obtained the Gift Funds, as long as the funds are not associated with the sales transaction.
Q: Can real estate agents use their commissions as part of the down payment?
Yes, a family member who is a licensed real estate agent may also donate their commission.
There are many more down payment options that can be considered by an FHA underwriter as acceptable funds to close.
It is important to be completely transparent with your loan officer at the time of the initial application and financial strategy session so that we can put a game plan together for your individual scenario and goals.