Key highlights from this article:
- HUD Handbook 4000.1 outlines the acceptable down payment sources for FHA loans.
- Borrowers who use this program to buy a house can only use funds from an approved source.
- Down payment funds may come from savings, cash saved at home, investments, and more.
- Keep reading below for a closer look at these FHA loan requirements.
The Federal Housing Administration is popular among home buyers with limited funds saved for a down payment. That’s because this government-backed mortgage program allows borrowers to make a minimum upfront investment as low as 3.5% of the purchase price.
But there are specific rules and requirements for down payments on FHA loans, and some of them apply to the source of funds. In short, borrowers who use this program to buy a house must use down payment funds from an acceptable source, as defined by HUD.
The good news is that the Department of Housing and Urban Development (HUD), which manages the program, allows a broad range of sources for down payment funds on FHA loans. The money can come from a savings or checking account, cash saved at home, stocks and bonds, and a number of other approved sources.
But it cannot come from the seller.
Acceptable Down Payment Sources for FHA Loans
A list of acceptable down payment sources for FHA loans can be found in HUD Handbook 4000.1, also known as the Single Family Housing Policy Handbook. This publication (which is available online) serves as the official guide for the Federal Housing Administration’s mortgage insurance program.
Approved down payment sources are outlined in Part II, Section A-4 of the handbook, under the sub-heading “Sources of Funds.” Here’s a closer look at some of the acceptable sources mentioned in that part of the handbook:
1.Checking and Savings Accounts
This is one of the most common sources for down payment funds among home buyers who use FHA loans. It’s also an acceptable source. These are funds that come from a borrower-held account in a “financial institution that allows for withdrawals and deposits,” according to the handbook.
The mortgage lender must verify and document the existence of the checking and/or savings accounts, and the amount they hold. They typically do this by obtaining bank statements and related documents from the borrower.
2. Cash on Hand
Money that you’ve saved at home is another acceptable source of FHA down payment funds, in most cases. The official program handbook defines “cash on hand” as being cash “held by the Borrower outside of a financial institution.” In other words, it’s money you have that’s not sitting in a bank.
There are some specific requirements for documenting this FHA down payment source. HUD guidelines state that mortgage lenders must verify cash on hand by obtaining an explanation (typically in writing) from the borrower. The explanation letter should describe how the funds were accumulated, and also how long it took to accumulate them.
The handbook also says the lender should determine the “reasonableness of the accumulation” of funds, based on the timeline provided by the borrower. This is done by considering the borrower’s income and expenses, spending habits, and banking history.
If all of this checks out, then cash on hand could be considered an acceptable down payment source for FHA mortgage loans.
3. Retirement Accounts
Some borrowers who use this program withdraw money from their retirement accounts to put toward their FHA loan down payment and/or closing costs. And that is allowable in most scenarios. But there are a few requirements for using such funds.
In this context, the term “retirement accounts” includes such things as IRAs, thrift savings plans, 401(k) plans, and Keogh accounts.
According to the Single Family Housing Policy Handbook, the bank or lender making the loan can “include up to 60 percent of the value of assets, less any existing loans, from the Borrower’s retirement accounts … unless the Borrower provides conclusive evidence that a higher percentage may be withdrawn after subtracting any federal income tax and withdrawal penalties.”
Like other FHA down payment sources, there are some verification and documentation requirements here as well. (You probably saw that coming.)
In a typical scenario, the mortgage lender will obtain the most recent monthly or quarterly statement for the accounts. This allows the lender to verify the actual amount in the retirement accounts. The handbook also says lenders should determine the borrower’s eligibility for making withdrawals, and review the terms and conditions for making such a withdrawal.
4. Stocks and Bonds
Investment assets accumulated by the borrower — such as stock and bonds — are another acceptable source of down payment funds for FHA loans.
HUD puts the burden on mortgage lenders to determine the value of the stocks and bonds being used for this purpose. To do this, lenders can review the most recent monthly or quarterly statement(s) relating to those assets.
If the stocks and bonds are being held in a brokerage-type account, the lender can determine their value through third-party verification.
There are additional documentation requirements when stocks and bonds are used as an FHA down payment source. The handbook states that lenders must verify the existence of these assets “by obtaining brokerage statement(s) for each account for the most recent two months.” If the stocks and bonds are not held in a brokerage account, the lender can obtain a copy of the certificates.
5. Private Savings Club
As defined by HUD, a private savings club is a non-traditional method of saving in which members make deposits into a managed resource pool. This too can be an acceptable down payment source for an FHA-insured mortgage loan.
As for the documentation requirements, the handbook states that lenders must obtain the club’s account ledgers and receipts, and a verification from the treasurer that the club is still active.
6. Gifts from an Approved Donor
Within the context of FHA down payments, a “gift” is when an approved donor contributes cash or equity with no expectation of repayment. This is an acceptable source of down payment funds for borrowers using an FHA loan.
It’s also fairly common. According to the government-sponsored mortgage buyer Freddie Mac, about 25% of home buyers use a gift or loan from family and friends.
While gift money can be an acceptable down payment source for FHA loans, HUD has some specific rules and requirements for them. We’ve covered gift money in a separate article. Here’s the short version:
The person(s) or organization that provides the gift money must also provide a letter stating that they do not expect repayment. In other words, the money must truly be a gift — not a personal loan.
Disclaimers: This article provides an overview of some of the most commonly used down payment sources for FHA-insured mortgages. This information was adapted from HUD Handbook 4000.1 in June 2019. The funding sources listed above are acceptable in most borrowing scenarios, as long as all verification and documentation requirements have been met. In addition to those listed above, there may be other down payment sources that are acceptable within this program. Borrowers who wish to learn more can refer to the aforementioned handbook or speak to an FHA-approved lender.