There’s a new handbook for FHA loans, and it outlines the down payment rules and requirements for home buyers who want to use the popular program. In 2016, the minimum down payment for an FHA-insured mortgage loan will remain at 3.5%, the same as last year.
The new handbook also provides guidelines for borrowers who want to use down payment money donated by a friend or family member, or from some other approved third-party source. Here’s an updated look at FHA down payment requirements and gift guidelines for 2016.
Minimum Down Payment for FHA Loans in 2016: 3.5%
Borrowers who use an FHA loan to buy a home in 2016 must make a down payment of at least 3.5%. This is the minimum requirement for the borrower’s investment.
In its new handbook, the Department of Housing and Urban Development (HUD) explains the maximum loan-to-value (LTV) ratio that is allowed for FHA-insured mortgages: “For purchase transactions, the maximum LTV is 96.5 percent of the Adjusted Value,” the handbook states.
Borrowers can obtain an FHA loan up to 96.5% of the appraised home value or the purchase price, whichever is less. This means they must pay the remaining amount out of pocket, in the form of a down payment.
But this out-of-pocket investment doesn’t necessarily have to come from the borrower. HUD allows a variety of third-party donors to contribute funds to the home buyer’s cause. The new handbook has some specific rules and requirements for these down payment “gifts” as well.
Gift Rules and Requirements: Hint, You’ll Need a Letter
So the minimum down payment requirement for FHA loans in 2016 is 3.5%. Those funds can come directly from the borrower, or from a number of “approved sources.” One of the benefits of using an FHA-insured mortgage is that the entire down payment can be in the form of a gift. So a person could finance a home purchase through this program using none of their own money.
The new HUD handbook defines a gift as “contributions of cash or equity with no expectation of repayment.”
Gifted funds can come from a borrower’s relative — that’s the most common source. But it’s not the only one. Charitable organizations, employers, and labor unions are also acceptable sources for FHA down payment gift funds. A close friend can also contribute money to be used for the upfront investment, as long as the donor has a “clearly defined and documented interest” in the home buyer / borrower.
Here’s the key requirement for FHA down payment gifts in 2016, regardless of where the money comes from. It must truly be a gift — and not a loan. In other words, the person donating the funds must not expect any form of repayment from the borrower. Furthermore, they must provide a signed letter to this effect, and the letter must be included within the FHA loan application file.
HUD Handbook 4000.1 states that the mortgage lender “must obtain a gift letter signed and dated by the donor and borrower that includes” (at a minimum) the donor’s name and address, his or her relation to the borrower, and the dollar amount of the down payment gift funds. It must also include a statement that no repayment is required.
Additionally, mortgage lenders must verify and document the transfer of money from donor to borrower. This is typically done with bank statements that show (A) the withdrawal from the donor’s account, and (B) the subsequent deposit into the borrower’s account. If the money is paid directly to the settlement agent at closing, the lender must verify the payment in accordance with HUD guidelines.
Same Requirements, New Packaging
Most mortgage lenders are familiar with these FHA down payment requirements, because they haven’t changed much in recent years. The new handbook consolidates and clarifies lending guidelines that were previously scattered across multiple handbook and policy letters, some of which are now outdated. That alone is an improvement. The guidelines are now more streamlined. But most of the requirements themselves are the same as last year. Same rules — new packaging.
Portions of the new handbook (officially known as the Single-Family Housing Policy Handbook) took effect in September of last year. So it covers all FHA purchase loans originated in 2016.
The new handbook can be downloaded in PDF format on the HUD.gov website. It’s also available through Allregs.com and FHAhandbook.com.