Mortgages are insured by the Federal Housing Administration given to home buyers by FHA-approved lenders. Buyers who use FHA-insured mortgage applications have money for a down payment. Since the government backs these loans, lending criteria –including for payments–frequently are relaxed. However, the FHA does have a number of down payment conditions.
Credit score requirements for an FHA-secured loan are often less than for mortgages not backed by the government. For 2010, borrowers with credit scores of 580 or better need only put down 3.5 percent of the sale price. However, FICO (Fair Isaac Credit Organization) scores under that amount will need a 10 percent down payment. Studies show that borrowers with low FICO scores and that don’t apply money to some down payment default at higher rates.
The FHA permits to cover down payments. Documentation requirements for these gifts are high, though. The donor must have what the FHA calls for a”logical connection” with the purchaser. This usually means parents, siblings and other close family members. Employers are also sometimes allowed to donate. So are close friends who will prove a strong connection.
Down Payment Assistance
The law prohibits a vendor from donating money to some non-profit organization that would subsequently distribute payment assistance to the vendor’s buyer. Before, sellers did so to get around FHA-imposed seller-assistance restrictions. Many cities and states also have down payment assistance programs, but most are frozen or severely curtailed because of financing problems.
Most closing costs can be included in the loan. This may increase the total amount of money required for the down payment, however. On a house loan of $200,000 with a 3.5 percent down payment demand, the overall down payment could be $7,000. Assume that another $7,000 of closing costs can be financed, bringing up the loan . That would increase the down payment to $7,490.
Cash gifts for a down payment has to be from the debtor’s bank account before the loan passes the underwriting procedure. Alternately, any gifts could be put into an escrow accounts different from the purchaser and the vendor. The lender will analyze the paperwork documenting the integrity of this gift before approving the loan. Additionally, seller contributions for closing costs are reduced from 6% of the sale price to 3 percent.