FHA Family Guidelines: A Little-Known Allowance

We wanted to bring to bring attention to a little-known allowance in FHA guidelines which allows a family member to lend a borrower money as a second TD. This helps meet the borrower’s minimum down payment requirements. Below is a bullet list of all the requirements, please take a moment to familiarize yourself if this sounds like something that might help you.

• The Secondary financing is disclosed at the time of the application;
• No costs associated with the secondary financing are financed into the FHA- insured first Mortgage;
• The secondary financing payments must be included in the total mortgage payment;
• The secondary financing must not result in cash back to the borrower except for refund of earnest money deposits or other borrower cost paid outside of closing;
• The secondary financing may be used to meet the borrower’s MRI;
• The CLTV ratio of the base loan amount and the secondary financing amount must not exceed 100 percent of the adjusted value;
• The secondary lien may not provide for a balloon payment within 10 years from the date of execution;
• Any periodic payments are level and monthly
• There is no prepayment penalty
• If the family member providing the secondary financing borrows the funds, the lending source may not be an entity with an identity of interest in the sale of the property, such as the:
  • Seller;
  • Builder;
  • Loan originator; or
  • Real estate agent;
• Mortgage companies with retail banking affiliates may have the affiliate lend the funds to the family member. However, the terms and conditions of the loan to the family member cannot be more favorable than they would be for any other borrowers;
• If funds loaned by the family member are borrowed from an acceptable source, the borrower may not be a co-obligor on the Note;
• If the loan from the family member is secured by the subject property, only the family member provider may be the note holder; and
• The secondary financing provided by the family member must not be transferred to another entity at or subsequent to closing.

Any secondary financing meeting this standard is deemed to have prior approval in accordance with 24 CFR § 203.32.

Required documentation: the mortgagee must obtain from the provider of any secondary financing:

• Documentation showing the amount of funds provided to the borrower for each transaction and source of funds; and
• Copies of the mortgage and Note

If the secondary financing funds are being borrowed by the family member and the documentation from the bank or other saving account is not available, the Mortgagee must have the family member provide written evidence that the funds were borrowed from an acceptable source, not from a party to the transaction, including the Mortgagee.

This is a rather long list of guidelines but the process is much easier than it might initially seem. If you have a helpful family member who is willing to help you out with owning your first home, now might be a time to reach out. This little-known allowance might be just what you were looking for.