Can the Seller Pay the Buyer’s Down Payment With FHA Loans

Can the seller pay for the buyer’s down payment when an FHA loan is being used? This is a common question among buyers and seller who are involved with an FHA-financed real estate transaction. And there’s a fairly straightforward answer. Here’s what you need to know.

The short answer: Home buyers who use FHA loans to buy a house can obtain gift money from an approved source. These funds can be applied to the down payment and other costs associated with the loan. But the official FHA handbook states that the “minimum required investment” cannot come from the seller or other “interested parties” involved in the transaction. Essentially, this means the seller cannot contribute money toward the buyer’s down payment with an FHA loan.

Seller Contributions Cannot Be Used for Borrower’s “MRI”

Part of the reason this subject confuses home buyers is the terminology. HUD Handbook 4000.1, which outlines the minimum requirements for the FHA loan program, uses terms such as the “minimum required investment” to describe the borrower’s down payment.

On page 225 of that handbook, we find the following definition:

“Minimum Required Investment (MRI) refers to the Borrower’s contribution in cash or its equivalent required by Section 203(b)(9) of the National Housing Act, which represents at least 3.5 percent of the Adjusted Value of the Property.”

That’s the minimum down payment required for this particular program. Home buyers who want to use an FHA loan to buy a house generally must put down at least 3.5% of the home’s value.

A few pages later, the handbook explains that monetary contributions from “interested parties” (such as the home seller) may not be used for the borrower’s MRI / down payment.

The Department of Housing and Urban Development defines interested parties as “sellers, real estate agents, builders, developers or other parties with an interest in the transaction.” While these parties may contribute toward the home buyer’s closing costs in some cases (generally up to 6% of the sales price), they cannot contribute to the down payment / minimum required investment.

Page 232 spells it out in plain English: “Interested Party Contributions may not be used for the Borrower’s MRI.”

Again, the MRI in this context refers to the minimum down payment for FHA loans, which is generally 3.5% of the purchase price or appraised value. This notion is repeated elsewhere in the handbook as well. On page 225, we find the following:

“The Mortgagee [i.e., mortgage lender] may only permit the Borrower’s MRI to be provided by a source permissible under Section 203(b)(9)(C) of the National Housing Act, which means the funds for the Borrower’s MRI must not come from: (1) the seller of the Property…”

Recapping key points in this article:

  • Home buyers who wish to use an FHA loan to buy a house must make a minimum required investment, or down payment, of at least 3.5% of the property’s adjusted value. (See our FHA down payment guide.)
  • The home seller is considered an “interested party” in the real estate transaction and therefore cannot contribute money toward the buyer’s minimum down-payment investment, according to HUD Handbook 4000.1.
  • Sellers are allowed to contribute money toward the buyer’s closing costs, generally up to 6% of the sales price.

Disclaimers: We are an independent publisher not affiliated with the Federal Housing Administration or HUD. The information above was adapted from official guidelines for the FHA loan program, and interpreted to the best of our ability. As such, this information is deemed accurate but not guaranteed. If you have specific questions about this program, you should direct them to the FHA Resource Center or to a HUD-approved mortgage lender.