Down Payment and Source of Funds for California FHA Home Buyers

Today, most California First-Time Home Buyers choose FHA Mortgages due to the low down payment (3.5%) that is required.

This can be a little confusing for borrowers looking at foreclosure properties that have a significant amount of perceived equity, but the FHA clearly defines that the minimum down payment on a purchase transaction is 3.5% of the lesser of the appraised value or the sales price.

In addition to the FHA 3.5% down payment, borrowers must have sufficient funds to cover borrower-paid closing costs such as pre-paid taxes, insurance, title, appraisal, underwriting, and processing fees.

All sources of funds have to be properly documented and verified. Underwriters will be looking to verify that there were no additional undocumented debts incurred by the borrower to obtain all or part of the required cash investment in the property.

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Acceptable sources of borrower funds include the following:

Savings and Checking Accounts
Earnest Money Deposit
Gift Funds
IRAs
Savings Bonds
Private savings club
401 (k) and Keogh Accounts
Stocks and Bonds
Thrift Savings Plans
Cash saved at home
Sales Proceeds
Sale of personal property
Commissions from sale
Trade Equity
Rent Credit
Collateralized Loans
Disaster Relief Grants and Loans
Employer’s Guarantee Plans
Employer Assistance Plans

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Questions About the Source of Down Payment Funds:

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Q: How is the Earnest Money Deposit verified?

The EMD is the initial deposit submitted with an accepted purchase contract offer which is held in an escrow account. These funds count towards the borrower’s down payment and/or closing costs.

The EMD is verified by a cancelled check, certification from the deposit-holder acknowledging receipt of funds, or separate evidence of the source of funds.

*If the EMD exceeds 2% of the sales price or appears to be excessive based on the borrower’s history of savings, there may be more documentation required to source and document the money trail.

Q: How are Savings and Checking Accounts verified?

A verification of deposit (VOD), along with the most recent bank statement is one way a lender may request to verify these funds. If there is a significant increase in an account, or the account was recently opened, a written letter of explanation may be required as well.

Q: What if I have been saving money in a jar or have mattress money?

The borrower will need to provide a written letter of explanation and evidence of the ability to accumulate the cash. This can include analyzing a borrower’s income stream, the time period which the funds were saved, spending habits, documented expenses, and a history of using financial institutions.

Q: How is a down payment documented from a 401 (k) or IRA?

While liquidation of the account is not required, underwriters will only use up to 60% of the value of the assets, unless the borrower can prove that a higher percentage an be withdrawn after subtracting any Federal income tax and penalties.

Q: Do I have to show liquidation of funds from Stocks or Bonds?

No, you may not have to show actual liquidation of funds from a Stock or Bond, but the accounts will be verified by providing monthly or quarterly statements.

Q: Who can give a Gift Fund?

A gift fund can be considered as an acceptable source of down payment as long as there is no expected of implied terms of repayment to the donor by the borrower.

Gift funds can be given by the following:

A relative
A close friend with a clearly defined and documented interest in the borrower
A charitable organization
A government agency or public entity that has a home ownership program
Borrower’s employer or labor union

FHA requires the donor to provide a statement from a viable account from which the gift is donated.

Q: Can real estate agents use their commissions as part of the down payment?

Yes, a family member who is a licensed real estate agent may also donate their commission.

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There are many more down payment options that can be considered by an FHA underwriter as acceptable funds to close.

It is important to be completely transparent with your loan officer at the time of the initial application and financial strategy session so that we can put a game plan together for your individual scenario and goals.

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3700 Hilborn Rd #700
Fairfield CA 94534
951-506-4663 | Email