- All home buyers who use FHA loans must put down at least 3.5%.
- HUD has specific requirements for acceptable down payment sources.
- Checking and savings accounts are the common sources of funds.
- You could also use retirement accounts, stocks and bonds, and gifts.
The Federal Housing Administration loan program is popular among home buyers who don’t have a lot of money saved for a down payment. These government-backed mortgages allow borrowers to make a minimum upfront investment as low as 3.5% of the purchase price.
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 could come from a savings or checking account, cash saved at home, stocks and bonds, retirement accounts, gift money, and other sources. But it can’t come from the seller.
Down Payment Sources for FHA Home Loans
Let’s cover some of the terminology being used here, before we continue.
FHA loan: A mortgage loan that’s insured by the government, through the Federal Housing Administration. FHA loans allow for a relatively low down payment and typically have more flexible qualification criteria compared to a regular loan. The government backing makes this possible.
Down payment: An upfront payment made when buying a home. Home buyers make down payments to reduce the amount of money they need to borrow from a lender. Down payments can range from 3% to 20% of the home’s purchase price. FHA loans require an investment of at least 3.5%.
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 (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, as part of the application and pre-approval process.
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.
Mortgage professionals often refer to this as “mattress money,” a reference to money that people traditionally kept hidden at home, such as under a mattress, instead of depositing it in a bank.
There are some specific requirements for documenting this down payment source. FHA loan 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, cash on hand could be considered an acceptable source of down payment funds for an FHA-insured mortgage loans.
3. Retirement Accounts
Some borrowers who use this program withdraw money from their retirement accounts to put toward their 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. These are funds accumulated for the purposes of retirement.
According to HUD, the lender 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.)
Mortgage lenders usually request the most recent monthly or quarterly statement for the accounts. This allows them to verify the actual amount that’s available through the retirement funds. They’ll also determine the borrower’s eligibility for making withdrawals, and the terms and conditions that apply.
But just because you can use a portion of your retirement funds for the FHA loan down payment doesn’t mean you should. You’ll want to consider the pros and cons before choosing this option.
On the upside, it could help you buy a home sooner, possibly avoiding mortgage insurance as well. But you might also incur penalties and taxes, while reducing your retirement savings as well.
Bottom line: Retirement accounts are considered an acceptable source of funds for the down payment on an FHA-backed home purchase. But it’s not as straightforward as some of the other sources on this list, and therefore requires careful consideration.
4. Stocks and Bonds
In most cases, borrowers can also use investment assets such as stock and bonds to meet the down payment requirement for an FHA home loan.
Here again, HUD puts the burden on mortgage lenders to determine the value of the stocks and bonds being used. 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 third-party donor contributes cash or equity with no expectation of repayment. One of the most common examples occurs when a parent provides money to help a child purchase their first home.
Such gifts are considered to be an acceptable source of down payment funds for 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.
But the money doesn’t have to come from family members. Current FHA guidelines allow borrowers to use gift money from a variety of sources, including employers, charitable organizations, and certain government agencies.
While gift money can be an acceptable down payment source for FHA loans, HUD has some specific rules and requirements for using it. We’ve covered gift money in a separate article.
Here’s the short version: The person 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 guide was adapted from HUD Handbook 4000.1 and updated in spring 2024. You might have other options for your down payment funds, in addition to those listed above. If you have questions about this subject, you can refer to the above-mentioned handbook or use the FHA Resource Center.