FHA Loans and Down Payment Assistance

Here’s a question we get from many new homebuyers: Do you have to use an Federal Housing Administration (FHA) loan with down payment assistance? The answer is no — there are different types of mortgages available depending on your situation.

Each down payment assistance program has a list of “eligible first mortgages” that can be used with the program. A first mortgage is simply your primary home loan. And your down payment assistance can come in many forms, such as a gift forgiven at closing or a second mortgage — funded by a Housing Finance Agency (HFA), municipality, nonprofit or employer. Most down payment programs accept a range of first mortgages, including conventional, FHA, USDA and VA loans.

Loan types

FHA loans have long been popular for first-time homebuyers because of the low 3.5% down payment requirement and flexible credit requirements. However, it’s important to understand that conventional loans accept just 3% down and can be paired with a down payment assistance program. Another FHA loan alternative are HFA Advantage or HFA Preferred conventional loans (these are loans with added flexibilities offered by Housing Finance Agencies), providing the lowest mortgage insurance rates for HFA loans — with or without a down payment assistance program.

It’s important to compare different mortgage loans to see what works best for your situation.

HUD guidelines

Recently HUD issued new guidelines for down payment assistance on mortgages insured by the FHA. So, what’s new?

The new guidelines are intended to clarify an existing rule and would require federal, state or local government HFAs to supply a modified obligation letter, along with documentation that they are authorized to provide down payment assistance in their jurisdiction. Lenders would be required to supply that documentation at the loan level. HFAs, down payment assistance providers in general, and lenders are consulting with their legal counsel to ensure compliance with HUD’s proposed requirements.

What’s the impact to homebuyers?

Here are three things to know:

1. The rule doesn’t impact conventional lending through Fannie Mae and Freddie Mac, including HFA Advantage and HFA Preferred – it only impacts FHA loans.

2. FHA still allows for down payment assistance, but with clarification about how and from whom that assistance may be provided.

3. HUD issued a delay on the implementation of the new rules until July 23, 2019, allowing program providers and lenders to review the Mortgagee Letter. It’s currently business as usual for down payment assistance and FHA loans until July 23, 2019.

Down Payment Resource is committed to providing the most accurate and up-to-date information on affordable lending programs across the country. We already initiated outreach to the providers of all programs in DPR and will closely track and make updates to program requirements as necessary, including any impact or change to eligible first mortgage types for each down payment assistance program.

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