Down payments can be more complicated than you think for first-time home buyers. Down Payments are thought to be very straightforward but have a lot of stipulations and rules. 

First-time homebuyers seeking an FHA loan with less than 15% or 20% down often face big obstacles. Not all money is the same and there will be hoops to jump through. Even though you can have a lower credit score than traditional bank loans they still look at income. 

You’ll need a credit score of 580 or more to qualify. A 500-579 credit score will require a higher down payment. FHA doesn’t actually lend you money for a mortgage but offers mortgage lenders insured lending. Instead, you would work with a qualified lender who provides FHA loans.

While 3.5% is the minimum downpayment required in most FHA loans they have a specific requirement of where that money comes from. 3-6 months of bank reports are often required and loan officers and loan companies will often look at every dollar earned. This is because all funds must be earned. 

FHA loans also require the purchase of mortgage insurance and premium payments are made to FHA.

Arm’s-Length Rules

Federal Housing Administration loans are issued by FHA-approved banks and lending institutions; these institutions will evaluate your qualifications for the loan.

Additionally, FHA prohibits some transactions if they fall within an arm’s-length transaction. If you want to buy a home built by a construction company that is related to you or have your employer work on your home, you may be in trouble. 

Exemptions from this rule include: 

  • If your family member is selling their primary residence to you (meaning the home they currently live in for most of the year, as opposed to a vacation home or investment property), you can pay just 3.5% down.
  • If you’re buying the home you’re currently renting from your landlord, you can pay just 3.5% down as long as you can prove that you’ve lived in the home for at least six months leading up to the purchase.
  • Sometimes corporations may buy an employee’s home during a corporate relocation and resell it to another employee. This corporate exception allows the buyer to pay the standard 3.5% down despite the existing relationship with their employer.

Gifts and More

Many home buyers will need help to get a downpayment together, but FHA loans have various restrictions on where that money comes from. Besides earning money through a W2 job you may also get a gift from the family within several limits. 

“Gifts refer to the contributions of cash or equity with no expectation of repayment.” – HUD.gov

FHA loan rules don’t just regulate the source of funds in this way, it also governs who may provide such gifts:

  • Borrower’s family member
  • Borrower’s employer or labor union
  • A close friend with a clearly defined and documented interest in the borrower
  • A charitable organization
  • A governmental agency or public entity that has a program providing homeownership assistance to low or moderate-income families; or first-time homebuyers.

In all of these cases the borrower must document all of the transactions and the person or organization may need to sign documents and provide bank statements of the transaction.

Lastly, other factors may disqualify you from obtaining an FHA loan regardless of you having a downpayment. These factors may include a recent low credit, recent bankruptcy, new job or business, high debt, etc. Some properties like condos are also exempt. 

If you fall into one of these categories and can’t qualify for a traditional bank loan or FHA loan you may still qualify through Home Equity Partner!