funds to close
The borrower's cash investment in the property must equal the difference between the amount of the FHA mortgage, excluding any upfront MIP, and the total cost to acquire the property (to include prepaid expenses, closing costs, etc.) All funds must be verified from acceptable sources.
Acceptable sources of these funds include:
Earnest Money Deposit: If the amount of the earnest money deposit exceeds 2% of the sales price or appears excessive based on the borrower's history of accumulating savings, the deposit amount and source of funds must be verified. Otherwise, satisfactory documentation includes a copy of the borrower's canceled check or verification from the bank.
Savings and Checking Accounts: The lender must verify these accounts. The borrower will need to provide the last three most recent bank statements. If a large increase in deposits is present or the account was recently opened, an explanation and verification of the source of the deposit must be established. Non-sufficient funds, bounced checks, or account overdrafts will need to be reasonably explained.
Gift Funds: An outright gift is acceptable if it is from: 1) a relative of the borrower, 2) the borrower's employer or labor union, 3) a charitable organization, or 4) a governmental agency or public entity that has a program established to provide homeownership assistance to low and moderate income families. No repayment of the gift may be expected or implied. Furthermore, a gift letter signed by both the donor and the borrower stating the amount of the gift and that repayment is not required, provides the donor's name, address, phone number, and relationship to the borrower will be required. In addition, verification of the transfer of funds from the donor's account to the borrower's account, via copies of the donor's canceled check, for example, and the borrower's deposit slip or bank statement will be necessary.
Sales Proceeds: Sale of an asset is considered an acceptable source of income if the borrower provides: 1) copy of the bill of sale or HUD-1 Settlement Statement (for the sale of a home), 2) copy of the check or verification of funds transfer from the buyer of the asset to the borrower, and 3) copy of the borrower's deposit slip or bank statement showing the deposit of the funds into the borrower's bank account.
Cash Saved at Home (i.e. Mattress Money): Cash must first be deposited in a financial institution or held by the escrow/closing agent. The borrower must provide an explanation of how the funds were accumulated and the length of time taken to do so. The lender must determine the credibility of the savings based on the borrower's income, spending habits, and history of using financial institutions, as well as considering how long it took to accumulate the funds.
Rent Credit: If the portion of a borrower's current rental payment is to be used to purchase the property the borrower currently occupies, the borrower will need to provide a copy of the rental/lease agreement showing an option to purchase with the clause stating how much of the rental payment is to be used as a rent credit. It is the lender's responsibility to show that the rent payment is above FHA's estimate of fair market rent. If the rent paid by the borrower is less than fair market, or if the seller has agreed to permit the borrower to occupy the property rent-free, this amount must be deducted from the sales price as a sales concession before determining the borrower's maximum insurable FHA loan amount.
