A Solution for FHA Buyers Searching for a Down Payment

DPA’s, such as Nehemiah, will no longer be allowed with FHA mortgages as of October 1, 2008 with the passage of HR 3221.  Congress currently has legislation in the works to bring DPA’s back to life for those with better credit scores…but until that is successfully passed, DPAs are soon to be gone.   

Buyers who are shy on down payment (or wish not to tap out their savings) can ask intermediate family members for a loan.  Here are some of the FHA guidelines:

  • The loan can be secured or unsecured against the subject property.  No third parties.
  • The loan must only be with immediate family (parent, stepparent, grandparent, child, adopted or foster child, etc.)
  • The family member can borrower the funds for the loan–however, the loan must be between the family member (again, no third parties allowed).
  • No balloon payments can be due within 5 years.
  • Borrower must qualify for both loans (FHA mortgage and the family loan).   Terms of the family must be submitted to underwriting.
  • The combined loan to value (when you factor both loans) may exceed 100% of the sales price however, no cash back to the borrower is allowed (except for the earnest money deposit).

Sellers can still contribute up to 6% of the sales price towards actual closing costs and prepaids AFTER the borrower has met their 3.5% contribution towards down payment (this is where the family loan comes in).  If the home buyer has not owned a home for the past 36 months, they may qualify for the First Time Homebuyer Tax Credit which could give them up to $7500 to pay back the family loan once they receive their tax refund. 

Family members can still provide "gift" funds towards the down payment and closing costs as long as they do not expect repayment.  Currently, the IRS permits up to $12,000 per person for an annual gift before gift taxes are to be paid without tax.

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