B. Acceptable Sources of Borrower Funds

Under most FHA programs, the borrower is required to make a minimum down payment into the transaction of at least 3.5 percent of the lesser of the appraised value of the property or the sales price.

Additionally, the borrower must have sufficient funds to cover borrower-paid closing costs and fees at the time of settlement. Such funds used to cover the required minimum down payment, as well as closing costs and fees, must come from acceptable sources and must be verified and properly documented.

References: For more information on

• the required minimum down payment, see HUD 4155.1 2.A.2.c
• settlement requirements, see HUD 4155.1 5.A, and
• acceptable sources of borrower funds, see HUD 4155.1 5.B.1.b.

The table below lists the acceptable sources of borrower funds and a reference for locating additional information on the various types of funds.

The lender must verify with documentation, the deposit amount and source of funds, if the amount of the earnest money deposit

• exceeds 2 percent of the sales price, or
• appears excessive based on the borrower's history of accumulating savings.

Satisfactory documentation includes

• a copy of the borrower's cancelled check
• certification from the deposit-holder acknowledging receipt of funds, or
• separate evidence of the source of funds.

Separate evidence includes a verification of deposit (VOD) or bank statement showing that the average balance was sufficient to cover the amount of the earnest money deposit, at the time of the deposit.

A VOD, along with the most recent bank statement, may be used to verify savings and checking accounts.

If there is a large increase in an account, or the account was recently opened, the lender must obtain from the borrower a credible explanation of the source of the funds.

TOTAL Scorecard Accept and Refer recommendations require that the lender

• obtain an explanation and documentation for recent large deposits in excess of 2 percent of the property sales price, and
• verify that any recent debts were not incurred to obtain part, or all, of the required cash investment on the property being purchased.

Reference: For additional information on TOTAL Scorecard, see HUD 4155.1 6.A.1.

Borrowers who have saved cash at home, and are able to adequately demonstrate the ability to do so, are permitted to have this money included as an acceptable source of funds to close the mortgage.

To include cash saved at home when assessing the borrower's cash assets, the

• money must be verified, whether deposited in a financial institution, or held by the escrow/title company, and
• borrower must provide satisfactory evidence of the ability to accumulate such savings.

Reference: For information on verifying cash saved at home, see HUD 4155.1 5.B.2.d.

Verifying the cash saved at home assets requires the borrower to explain in writing

• how the funds were accumulated, and
• the amount of time it took to accumulate the funds.

The lender must determine the reasonableness of the accumulation, based on the

• borrower's income stream
• time period during which the funds were saved
• borrower's spending habits, and
• documented expenses and the borrower's history of using financial institutions.

Note: Borrowers with checking and/or savings accounts are less likely to save money at home, than individuals with no history of such accounts.

Some borrowers may choose to use non-traditional methods to save money by making deposits into private savings clubs. Often, these private savings clubs pool resources for use among the membership.

If a borrower claims that the cash to close an FHA-insured mortgage is from savings held with a private savings club, he/she must be able to adequately document the accumulation of the funds with the club.

Reference: For information on the requirements for private savings clubs, see HUD 4155.1 5.B.2.f.

While private savings clubs are not supervised banking institutions, the clubs must, at a minimum, have

• account ledgers
• receipts from the club
• verification from the club treasurer, and
• identification of the club.

The lender must reverify the information, and the underwriter must be able to determine that

• it was reasonable for the borrower to have saved the money claimed, and
• there is no evidence that the funds were borrowed with an expectation of repayment.

Up to 60 percent of the value of assets such as IRAs, thrift savings plans, 401(k) and Keogh accounts may be included in the underwriting analysis, unless the borrower provides conclusive evidence that a higher percentage may be withdrawn, after subtracting any

• Federal income tax, and
• withdrawal penalties.

Notes:

• Redemption evidence is required.
• The portion of the assets not used to meet closing requirements, after adjusting for taxes and penalties, may be counted as reserves.

TOTAL Scorecard Accept/Reject Recommendation

TOTAL Scorecard Accept or Reject recommendations require the lender to document the terms and conditions for withdrawal and/or borrowing, and that the borrower is eligible for these withdrawals.

Use only 60 percent of the amount in the account, unless the borrower presents documentation supporting a greater amount, after subtracting any taxes or penalties for early withdrawal.

Note: Liquidation evidence is not required.

The monthly or quarterly statement provided by the stockbroker or financial institution managing the portfolio may be used to verify the value of stocks and bonds.

Total Scorecard Accept Recommendation

Evidence of liquidation is not required for the TOTAL Scorecard Accept recommendation.

Note: The actual receipt of funds must be verified and documented.

Government issued bonds are counted at the original purchase price, unless eligibility for redemption and the redemption value are confirmed.

Note: The actual receipt of funds at redemption must be verified.

In order for funds to be considered a gift there must be no expected or implied repayment of the funds to the donor by the borrower.

Note: The portion of the gift not used to meet closing requirements may be counted as reserves.

An outright gift of the cash investment is acceptable if the donor is

• the borrower's relative
• the borrower's employer or labor union
• a charitable organization
• a governmental agency or public entity that has a program providing home ownership assistance to
• low- and moderate-income families
• first-time homebuyers, or
• a close friend with a clearly defined and documented interest in the borrower.

The gift donor may not be a person or entity with an interest in the sale of the property, such as

• the seller
• the real estate agent or broker
• the builder, or
• an associated entity.

Gifts from these sources are considered inducements to purchase, and must be subtracted from the sales price.

Note: This applies to properties where the seller is a government agency selling foreclosed properties, such as the US Department of Veterans Affairs (VA) or Rural Housing Services.

Regardless of when gift funds are made available to a borrower, the lender must be able to determine that the gift funds were not provided by an unacceptable source, and were the donor's own funds.

When the transfer occurs at closing, the lender is responsible for verifying that the closing agent received the funds from the donor for the amount of the gift, and that the funds were from an acceptable source.

Reference: For the requirements regarding the documentation of this transfer at closing, see HUD 4155.1 5.B.5.b.

As a general rule, FHA is not concerned with how a donor obtains gift funds, provided that the funds are not derived in any manner from a party to the sales transaction.

Donors may borrow gift funds from any other acceptable source, provided the mortgage borrowers are not obligors to any note to secure money borrowed to give the gift.

Only family members may provide equity credit as a gift on property being sold to other family members.

The restrictions on gifts previously discussed in this topic and the restriction on equity credit may be waived by the jurisdictional Homeownership Center (HOC), provided that the seller is contributing to or operating an acceptable affordable housing program.

FHA regards the payment of consumer debt by third parties to be an inducement to purchase.

While FHA permits sellers and other parties to make contributions of up to 6 percent of the sales price of a property toward a buyer's actual closing costs and financing concessions, this requirement applies exclusively to the mortgage financing provision.

When someone other than a family member has paid off debts or other expenses on behalf of the borrower

• the funds must be treated as an inducement to purchase, and
• there must be a dollar for dollar reduction to the sales price when calculating the maximum insurable mortgage.

Note: The dollar for dollar reduction to the sales price also applies to gift funds not meeting the requirement

• that the gift be for down payment assistance, and
• that it be provided by an acceptable source.

FHA does not "approve" down payment assistance programs providing gifts administered by charitable organizations, such as nonprofits. FHA also does not allow nonprofit entities to provide gifts to pay off

• installment loans
• credit cards
• collections
• judgments, and
• similar debts.

Lenders must ensure that a gift provided by a charitable organization meets the appropriate FHA requirements, and that the transfer of funds is properly documented.

If a charitable organization makes a gift that is to be used for all, or part, of a borrower's down payment, and the organization providing the gift loses or gives up its Federal tax exempt status, FHA will recognize the gift as an acceptable source of the down payment provided that

• the gift is made to the borrower
• the gift is properly documented, and
• the borrower has entered into a contract of sale (including any amendments to purchase price) on, or before, the date the IRS officially announces that the charitable organization's tax exempt status is terminated.

The lender is responsible for ensuring that an entity is a charitable organization as defined by Section 501(a) of the Internal Revenue Code (IRC) of 1986 pursuant to Section 501(c) (3) of the IRC.

One resource available to lenders for obtaining this information is the Internal Revenue Service (IRS) Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986, which contains a list of organizations eligible to receive tax-deductible charitable contributions.

The IRS has an online version of this list that can help lenders and others conduct a search of these organizations. The online version can be found at http://apps.irs.gov/app/pub78 using the following instructions to obtain the latest update:

• enter search data and click "Search"
• click "Search for Charities" under the "Charities & Non-Profits Topics" heading on the left-hand side of the page
• click "Recent Revocations and Deletions from Cumulative List" under the "Additional Information" heading in the middle of the page, and
• click the name of the organization if the name appears on the list displayed.

In addition, FHA has developed a web page that provides a listing of down payment assistance providers whose nonprofit status has been revoked. This page can be found at http://www.hud.gov/offices/hsg....

A lender must document any borrower gift funds through a gift letter, signed by the donor and borrower. The gift letter must

• show the donor's name, address, telephone number
• specify the dollar amount of the gift, and
• state
• the nature of the donor's relationship to the borrower, and
• that no repayment is required.

TOTAL Scorecard Accept/Refer Recommendation

For the TOTAL Scorecard Accept and Refer recommendation, the borrower must list the following:

• name, address, telephone number
• relationship to the home buyer, and
• the dollar amount of the gift on the loan application or in a gift letter for each cash gift received.

If sufficient funds required for closing are not already verified in the borrower's accounts, document the transfer of the gift funds to the borrower's accounts, in accordance with the instructions described in HUD 4155.1 5.B.5.b.

Reference: For additional information on the TOTAL Scorecard, see HUD 4155.1 6.A.1.

The lender must document the transfer of the gift funds from the donor to the borrower.

The table below describes the requirements for the transfer of gift funds.

In order to obtain cash for closing, a borrower may sell various personal property items. The types of personal property items that a borrower can sell include

• cars
• recreational vehicles
• stamps
• coins, and
• baseball card collections.

If a borrower plans to sell personal property items to obtain funds for closing, he/she must provide

• satisfactory estimate of the worth of the personal property items, and
• evidence that the items were sold.

The estimated worth of the items being sold may be in the form of

• published value estimates issued by organizations, such as
• automobile dealers, or
• philatelic or numismatic associations, or
• a separate written appraisal by a qualified appraiser with no financial interest in the loan transaction.

Only the lesser of the estimated value or actual sales prices are considered as assets to close.

The net proceeds from an arms-length sale of a currently owned property may be used for the cash investment on a new house. The borrower must provide a fully executed HUD-1 Settlement Statement as satisfactory evidence of the accrued cash sales proceeds.

If the property has not sold by the time of underwriting, condition loan approval by verifying the actual proceeds received by the borrower. The lender must document the

• actual sale, and
• sufficiency of the net proceeds required for settlement.

Note: If the property has not sold by the time of the subject settlement, the existing mortgage must be included as a liability for qualifying purposes.

If the borrower is a licensed real estate agent entitled to a real estate commission from the sale of the property being purchased, then he/she may use that amount for the cash investment, with no adjustment to the maximum mortgage required.

A family member entitled to the commission may also provide gift funds to the borrower.

Reference: For information on gift fund requirements, see HUD 4155.1 5.B.4.

The borrower may agree to trade his/her real property to the seller as part of the cash investment. The amount of the borrower's equity contribution is determined by

• using the lesser of the property's appraised value or sales price, and
• subtracting all liens against the property being traded, along with any real estate commission.

In order to establish the property value, the borrower must provide

• a residential appraisal no more than six months old to determine the property's value, and
• evidence of ownership.

Note: If the property being traded has an FHA-insured mortgage, assumption processing requirements and restrictions apply.

Reference: For more information on assumptions, see HUD 4155.1 7.

The cumulative amount of rental payments that exceed the appraiser's estimate of fair market rent may be considered accumulation of the borrower's cash investment.

The following must be included in the endorsement package:

• rent with option to purchase agreement, and
• appraiser's estimate of market rent.

Conversely, treat the rent as an inducement to purchase with an appropriate reduction to the mortgage, if the sales agreement reveals that the borrower

• has been living in the property rent-free, or
• has an agreement to occupy the property as a rental considerably below fair market value in anticipation of eventual purchase.

Exception: An exception may be granted when a builder

• fails to deliver a property at an agreed to time, and
• permits the borrower to occupy an existing or other unit for less than market rent until construction is complete.

Labor performed, or materials furnished by the borrower before closing on the property being purchased (known as "sweat equity"), may be considered the equivalent of a cash investment, to the amount of the estimated cost of the work or materials.

Note: Sweat equity may also be "gifted," subject to

• the additional requirements in HUD 4155.1 5.B.6.h, and
• the gift fund requirements described in HUD 4155.1 5.B.4.

The table below describes additional requirements for applying sweat equity as a cash equivalent and as an acceptable source of borrower funds.

An acceptable source of borrower cash investment commonly associated with manufactured homes is the sale or trade-in of another manufactured home that is not considered real estate. Trade-ins for cash funds are considered a seller inducement and are not permitted.

Funds may be borrowed for the total required investment, as long as satisfactory evidence is provided that the funds are fully secured by investment accounts or real property. These assets may include stocks, bonds, and real estate other than the property being purchased.

Certain types of loans secured against deposited funds, where repayment may be obtained through extinguishing the asset, do not require consideration of a repayment for qualifying purposes. The asset securing the loan may not be included as assets to close, or otherwise considered as available to the borrower. The types of deposited funds that can secure the loan include

• signature loans
• the cash value of life insurance policies, or
• loans secured by 401(k) accounts.

An independent third party must provide the borrowed funds for collateralized loans.

The seller, real estate agent or broker, lender, or other interested party may not provide such funds.

Unacceptable borrowed funds include

• unsecured signature loans
• cash advances on credit cards
• borrowing against household goods and furniture, and
• other similar unsecured financing.

Grants or loans from state and Federal agencies, such as the Federal Emergency Management Agency (FEMA), that provide immediate housing assistance to individuals displaced due to a natural disaster, may be used for the borrower's cash investment.

Secured or unsecured disaster relief loans administered by the Small Business Association (SBA) may also be used. If the SBA loan will be secured against the property being purchased, it must be clearly subordinate to the FHA-insured mortgage.

Note: Any monthly payment arising from this type of loan must be included in the qualifying ratios.

If the borrower's employer guarantees to purchase the borrower's previous residence as a result of relocation, he/she must submit evidence of the agreement.

The net proceeds must also be guaranteed.

If the employer pays the following to attract or retain valuable employees, the payment is considered employee compensation:

• employee's closing costs
• mortgage insurance premiums, or
• any portion of the cash investment.

An adjustment to the maximum mortgage amount is not required.

If the employer provides this benefit after loan settlement, the borrower must provide evidence of sufficient cash for closing.

Note: A salary advance cannot be considered as assets to close, since it represents an unsecured loan.