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 — no. Here’s what you need to know.

The short answer: Home buyers who use FHA loans to buy a house can obtain funds from an approved source. Acceptable sources include checking and savings accounts, money saved at home, retirement accounts, and more. Funds from these sources 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 Cannot Pay Borrower’s Down Payment (“MRI”) on FHA Loans

Part of the reason this subject confuses home buyers is the terminology involved. 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 home buyer’s down payment. But this is a somewhat esoteric term many borrowers aren’t familiar with.

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-insured mortgage loan to buy a house generally must put down at least 3.5% of the property’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 pay money toward 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…”

It’s All About Risk Avoidance

Statistically speaking, borrowers who put little or no money down on a home purchase are more likely to default on their mortgage loans later on. This is one of the main reasons why lenders require down payments in the first place. When borrowers have more “skin in the game,” they are less likely to default.

The FHA loan program has several features built into it that are designed to reduce financial losses resulting from borrower default. And this is why the seller cannot pay the down payment on an FHA loan. Federal housing officials view this as a risk factor.

In its 2018 report to congress, the Department of Housing and Urban Development provided a wealth of charts and statistics that show a correlation between down payment assistance and mortgage delinquency on FHA loans. In short, home buyers who receive down payment help are more likely to fall behind in their payments later on down the road.

That report also made a clear connection between the “seller-funded” down payments of the past and the large financial losses FHA incurred as a result.

To quote the report:

“Without swift and decisive action to address these programs, FHA may be unable to avoid the types of losses that it previously experienced with seller-funded downpayment assistance.”

Elsewhere, the report states:

“… the high [insurance] claim rates for mortgages with seller-funded downpayment assistance contributed negative $16.50 billion to the economic value of the MMIF as of the end of FY 2016. 51 The passage of the Housing and Economic Recovery Act (HERA), amending NHA section 203(b)(9)(c), prohibited the endorsement of seller-funded downpayment assistance after October 1, 2008.”

This is the primary reason why HUD does not allow sellers to contribute money toward the buyer’s down payment, when an FHA loan is being used. That practice led to significant financial losses in the past.

This program seeks to reduce risk in other ways as well. For instance, official policy requires borrowers to have a certain credit score, and also limits the amount of debt they can have. All of these measures are designed to mitigate risk, and to ensure the long-term viability of the program.

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.