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According to FHA underwriting guidelines, the borrower is required to contribute a minimum of 3.5% of the purchase price to the loan. There are a variety of sources that can be used to reach that 3.5% minimum investment. There is no such thing as a "light doc" FHA loan. All assets must be fully documented as either having been seasoned for a total of 60 days or they need to come from an eligible, documented source. In order to close and fund the loan, you must document adequate assets, including all closing costs and debt pay-off items that are going to be considered part of the borrower's expenses.
Document Large Deposits
When the lender or underwriter looks at the borrower's bank statements with a 60 day activity history, they will have to explain and document any unusually large deposits. The underwriter will look at asset statements closely to identify, and eliminate if necessary, any unusable asset sources that have been contributing to the balance of the borrowers' account.
Gift Funds are Allowed
Gift funds are considered the same as if they were the borrower's own money in the bank. They can be used to cover any and all closing costs, pre-paid expenses and the required 3% minimum statutory investment.
Gift funds can come from a large variety of sources including legitimate charities, the borrower's employer, or relatives. They can also come from non-relative individuals who have a long standing relationship with the borrower, as long as that individual is not associated with the transaction in any other way. For example, the individual can not be the real estate agent, developer, or builder on this particular sale.
A strong aspect of an FHA insured loan is that they do not require the borrower to have a certain number of months of payments in reserve to qualify. However, significant assets in reserve should be documented, as this will lessen the overall risk of the loan to the lender and make it easier to get the loan approved. Reserve assets can also offset other high risk issues and make it easier for the underwriter to approve the loan.
The Borrower Must Make a Minimum of 3.5% Investment
All borrowers must make a minimum (or statutory) investment of 3.5% of the purchase price in an FHA-approved loan transaction. However, the minimum investment does not have to be an actual cash down payment on the property. Certain closing costs can count towards the minimum 3.5% investment, which is also affected by the maximum mortgage amount, and will be addressed in greater detail in a later section. The 3.5% minimum investment from the borrower can also include FHA allowable closing costs that are paid by the borrower.
Allowable Sources are Numerous (4155-1 Ch. 2-10A – 2-10R)
The borrower can use many income sources to cover the minimum investment requirement, including gifts that are treated as if they were the borrower's own funds, and other assets. For a more specific and detailed listing of the types of assets that can be used for down payment and closing costs, please refer to paragraphs 2-10A through 2-10R in the HUD manual 4155-1 credit policy standards.
Non-Allowable Fees
FHA guidelines have certain limits on what types of fees can be charged to borrowers on FHA insured transactions. Prior to January 2006, FHA guidelines did not allow the lender, broker, or originator to charge any fees that are additional revenue fees, sometimes referred to as "junk fees," such as a processing fee. However, Mortgagee Letter 06-04 corrected this issue and now allows the broker to charge "customary and reasonable costs necessary to close the mortgage". These newly allowed fees include processing fees, broker underwriting fees, or commitment fees. However, there are still fairly strict limits on third party vendor fees as the lender is not allowed to "up-charge" any vendor fees. The borrower may only be charged up to the amount of the actual invoice. The lender cannot charge a tax service fee or more than a 1% origination fee except on Reverse Mortgages (HECM) & FHA 203K Renovation Mortgages. There are no limits on the amount of discount fees a lender can charge the borrower, however these discount fees or points cannot be used to meet the minimum investment requirement of 3.5%. Although FHA has lightened tremendously on the issue of closing costs, it is still an area that requires a little scrutiny when first learning to write FHA Loans.
Your Regional Home Ownership Center (HOC)
Chapter Two of the Home Ownership Center (HOC) Reference Guide includes specific and detailed information about non-allowable fees in your particular area. There are several Home Ownership Centers around the country that can be accessed directly via the HOC web site at: http://www.hud.gov/offices/hsg/sfh/hoc/hsghocs.cfm, or by selecting the Homeownership Center link located at the bottom right hand corner of the HUD homepage: www.hudclips.org. The HOC online reference guide provides information on the state or area you select. Through the HOC, HUD determines which fees are allowable in a particular area of the country. | 
