Loan Modification

FHA Loans: Finding Down Payment Sources

By Karen Lawson

FHA has recently decided to reduce seller contributions to buyers from 6% to 3%, and there is ongoing pressure for raising FHA minimum down payments from  3.5% to 5%.  FHA borrowers with credit scores of less than 580 will be required to put 10% down.  These developments and rising mortgage rates require FHA borrowers to come up with more cash.

FHA Guidelines for Down Payment Assistance

Aside from reducing allowable seller contributions to buyer closing costs, FHA has not moved to eliminate or reduce other forms of down payment assistance. These include:

• Gifts from family, friends, and employers: Cash gifts toward a down payment are allowed as long as you can document their source and amount.  Although not common, some employers may offer down payment assistance through matching funds or other arrangements.
• State and local homebuyer assistance programs: States typically have a housing finance agency that oversees programs for providing cash and loan assistance to first time buyers. First time buyers are generally defined as anyone who has not owned a home in the past three years. 

Requirements for individual programs can vary, but typically address:

• Owner occupancy: You must occupy the home you’re buying as your primary residence.
• Income requirements: Homebuyer programs typically  have income limits for eligibility.
• Homebuyer education: Homebuyer programs require completion of a homeowner education program. These programs discuss the address the expenses of owning and maintaining your home and understanding mortgage loans.

Check with your state and local programs for specific requirements.

What is a “Silent” Mortgage Loan?

Homebuyer assistance programs typically offer a low interest second mortgage loan for meeting your down payment and closing costs. Here’s how this type of assistance works:

After you’ve met eligibility requirements, the agency loans you funds for meeting down payments and closing costs. The housing assistance agency records a mortgage document establishing a lien against your home for the amount they’ve loaned. This type of loan is called “silent” because it doesn’t require repayment until you sell or otherwise vacate the home you’re buying. Some housing assistance programs do require payments; make sure you understand exactly when and how a housing assistance loan must be repaid before accepting it. 

FHA Guidelines: Understanding LTV and Home Equity

Loan-to-value is the ratio of loan amount to current home value expressed as a percentage. If a home is worth $100,000 and your mortgage amount is $90,000, the LTV is 90%.  The difference between your home value and your mortgage balance is the amount of your home equity; in the above scenario you would have approximately $10,000 in home equity, or 10%.

Combined loan-to-value (CLTV) is the total amount of a first and second mortgage divided by current home value. FHA doesn’t limit CLTV as long as secondary liens are subordinate to your FHA mortgage loan, and you have enough income to pay both first and second mortgage liens (if applicable).

FHA lenders can provide more information about down payment assistance programs in your area.

Full post as published by FHA Mortgage Guide on April 08, 2010 (boomark / email).