Logan's Uncle Wrote A Check For His Down Payment. FHA Rejected It, And It Wasn't About The Money

Two weeks before closing, Logan found out the check his uncle wrote him wasn't going to work. And it had nothing to do with the amount.

Logan was buying a home near Columbia, SC with an FHA loan. His uncle had given him a generous gift to help with the down payment. On top of that, his builder had offered some down payment assistance as an incentive to close the sale. It seemed like a straightforward, helpful situation. Then underwriting flagged it.

What Most Buyers Don't Know About FHA Down Payment Money

Most people assume that as long as the down payment amount is correct, the source doesn't matter much. That assumption is wrong, and it's one of the more common ways an FHA file hits a wall close to closing.

FHA requires every borrower to make a Minimum Required Investment, or MRI, equal to at least 3.5 percent of the home's adjusted value. But FHA doesn't just care about the amount. It cares just as much about where that money came from.

The Rule, In FHA's Own Words

HUD's guidelines are specific on this point: "The MRI must not come from the seller, any person or entity who financially benefits from the transaction, or anyone who is or will be reimbursed by such parties. Interested Party Contributions may not be used for the MRI."

In Logan's case, his uncle's gift was unconnected to the sale and perfectly acceptable. But the builder's down payment assistance came from a party with a direct financial stake in the transaction closing. Under FHA's rule, that made it an interested party contribution, and interested party contributions cannot be used to satisfy the minimum required investment, no matter how the offer is worded.

How This Gets Fixed

This didn't mean Logan lost either source of help. It meant the money had to be sorted by source and used correctly. The uncle's gift was documented properly as a true, unconnected gift and applied toward the required investment. The builder's contribution was restructured as a closing cost credit instead, which is a category where interested party money is permitted, just not toward the minimum down payment itself.

What You Can Do Before This Happens To You

If you're an FHA buyer receiving down payment help from family, a seller, or a builder, don't wait for underwriting to sort out the source. Ask directly: "Do you have any financial interest in this transaction closing, directly or indirectly?" That single question tells you almost everything you need to know about whether that money can count toward your down payment.

Then have your loan officer document the source of every down payment dollar in writing before the file ever goes to underwriting. Catching this early is the difference between a smooth closing and a scramble two weeks before your move-in date.

I Find The Path

A situation like Logan's comes up often with FHA buyers who have generous family members, helpful builders, or motivated sellers in the mix. The money isn't the problem. The source is what needs sorting out early.

If you're buying with FHA financing and someone has offered to help with your down payment, call me at 843-569-7283 before you get too far into the process. I'll help you figure out what counts, what doesn't, and how to structure it so nothing surprises you at closing.

Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448. Equal Housing Opportunity.

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