FHA Family Member Definition
The FHA family member definition is quite broad, and includes domestic partnerships, in-laws, and adopted children. This concept influences the FHA loan requirements and we need to study it separately, right now.
The U.S. Department of Housing and Urban Development (HUD) defines an FHA family member as a person related to the borrower by blood, marriage, or law, such as a spouse, child, parent, grandparent, sibling, or legal guardian.
The definition of an FHA family member is important in relation to FHA loan requirements because FHA loans are designed to make homeownership more accessible to low and moderate-income individuals and families. One of the benefits of FHA loans is that they allow borrowers to receive financial assistance from FHA family members to help with the down payment or closing costs.
For example, if a borrower’s parent is an FHA family member, the parent can provide a gift of funds to the borrower to cover some or all of the down payment or closing costs on an FHA loan. The gift must be documented properly, and there are limits on the amount of the gift that can be provided.
On the other hand, if the person providing the financial assistance is not an FHA family member, the funds may still be used for the down payment or closing costs, but additional documentation and scrutiny may be required to ensure that the funds are not a loan that will need to be repaid.
Another important aspect of the FHA family member definition is that it can affect the occupancy requirements for FHA loans. For example, if a borrower purchases a multi-unit property with an FHA loan and has an FHA family member living in one of the units, the borrower can count the rental income from that unit towards their income qualification for the loan.
FHA Family Member definition defined as follows, regardless of actual or perceived sexual orientation, gender identity, or legal marital status:
• Child, parent, or grandparent: Where the child is defined as a son, stepson, daughter, or stepdaughter; a parent or grandparent includes a step-parent/grandparent or foster parent/grandparent;
• Spouse or domestic partner;
• legally adopted son or daughter, including a child who is placed with the borrower by an authorized agency for legal adoption;
• foster child;
• brother, stepbrother;
• sister, stepsister;
• aunt; or
• son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law of the borrower.
Here is a table summarizing the potential impact of having an FHA family member or non-family member as a co-borrower on the down payment and credit score requirements for an FHA loan:
|FHA Family Member Co-Borrower
|Non FHA Family Member Co-Borrower
|May be lowered or eliminated if the family member provides financial assistance in the form of a gift or a loan.
|May be higher than the minimum required 3.5% down payment, depending on the lender’s policies and the borrower’s financial situation.
|The family member’s credit score can be used to offset a lower credit score of the primary borrower.
|The borrower’s credit score may need to meet higher requirements, depending on the lender’s policies and the borrower’s financial situation.
Here is an example for each case:
Example 1: FHA Family Member Co-Borrower Jane wants to buy a house but does not have enough savings to cover the 3.5% minimum down payment required for an FHA loan. Her father, who is an FHA family member, agrees to provide her with a gift of $5,000 towards the down payment. Jane applies for an FHA loan with her father as a co-borrower. The lender calculates the down payment based on the total purchase price minus the gift from Jane’s father, so Jane does not have to contribute any additional funds towards the down payment.
Example 2: Non-Family Member Co-Borrower Mark wants to buy a house but has a lower credit score of 560, which is below the minimum required credit score of 580 for an FHA loan. His friend agrees to be a co-borrower on the loan, but is not an FHA family member. The lender determines that Mark’s credit score is too low to qualify for the loan, but the friend’s higher credit score of 720 can be used to offset Mark’s lower score. However, the lender requires a higher down payment of 10% instead of the minimum required 3.5% to mitigate the risk of having a non-family co-borrower. Therefore, Mark has to provide a down payment of $22,000 instead of $8,750 (3.5% of a $250,000 home purchase price).
How Does FHA Define Family Member Versus Non-Family Member
Having an FHA family member as a co-borrower can make it easier to qualify for an FHA loan by providing additional financial resources and potentially lowering the debt-to-income ratio. However, if the co-borrower is not an FHA family member, there may be additional requirements and restrictions to qualify for the loan.
In accordance with HUD Rules, non-family members may be added to a loan. But, if the primary borrower includes non-family members as non-occupant co-borrowers, a 15% down payment is needed as opposed to the 3.5% downpayment required with an FHA family member.
When applying for an FHA loan, borrowers have the option of including a co-borrower on the loan. The co-borrower shares equal responsibility for repaying the loan and can help the primary borrower qualify for the loan by adding their income and assets to the application.
If the co-borrower is an FHA family member, it can help the primary borrower qualify for the loan more easily. This is because FHA family members are allowed to provide financial assistance to the borrower in the form of a gift or a loan. In addition, if the FHA family member lives with the borrower, their income can be included when determining the borrower’s debt-to-income ratio.
For example, if a borrower wants to purchase a home but their income alone does not meet the FHA loan requirements, they could apply for the loan with an FHA family member as a co-borrower. The family member’s income and assets would be added to the application, making it more likely that the borrower would qualify for the loan.
However, if the co-borrower is not an FHA family member, their income and assets may still be used to qualify for the loan, but there are additional requirements and restrictions. For instance, the lender may require a higher down payment or a higher credit score from the borrower to offset the risk of having a non-family co-borrower.
FHA Non Occupant Co Borrower
we will cover how FHA define member for non-occupant co-borrowers. HUD, the parent of FHA, implements FHA guidelines on How Does FHA Define Family Member? The definition of a family member will come into play when it comes to adding non-occupant co-borrowers. HUD 4000.1 Guidelines allow non-occupant co-borrowers to be added to an FHA Loan if the main borrower cannot qualify on their own due to not having enough income, no income, or negative income.
How Does Having A Co-Borrower Work in Practice
The FHA will allow another borrower, who will not live on-site, to co-sign on an FHA loan. When applying for a mortgage loan with a non-occupying co-borrower, the lender will take all of the income, liabilities, assets, and the credit score of both borrowers into account.
Since a non-occupying co-borrower can be included in the underwriting process, the occupying borrower often sees an improvement in their approval chances. Typically, non-occupying co-borrowers have a higher income or better credit score that can increase the occupying borrower’s chance of achieving homeownership.
HUD, the parent of FHA, does not have any restrictions on how many non-occupant co-borrowers can be added to the main borrower. However, FHA does require that non-occupant co-borrowers be family members of the main borrower for a 3.5% down payment home purchase FHA Loan.
HUD Down Payment Guidelines on Home Purchase With Non-Occupant Co-Borrowers
Under HUD Guidelines, non-occupant co-borrowers who are not related to the main borrower by law, blood, and/or marriage can qualify. However, non-family members who become co-borrowers are added to the FHA Loan, the main borrower needs to put in a 25% down payment. To qualify for a 3.5% down payment FHA Loan, non-occupant co-borrowers need to be family members.
Borrowers With Non-Occupant Co-Borrowers With FHA Versus Conforming Loans
Home Buyers with no income, little income, or negative income can qualify for an FHA home purchase mortgage loan with non-occupant co-borrowers. However, non-occupant co-borrowers also need to qualify with credit and other FHA Guidelines besides just income. With regards to credit scores, the lower of the two or more borrowers’ middle credit scores will be used for credit qualification purposes. For example, let’s take the following case scenario where the main borrower has two non-occupant co-borrowers:
- 520 FICO TransUnion
- 620 FICO Experian
- 700 FICO Equifax
Middle Credit Score 620 FICO
- 600 FICO TransUnion
- 700 FICO Experian
- 800 FICO Equifax
Middle Credit Score 700 FICO
- 500 FICO TransUnion
- 600 FICO Experian
- 750 FICO Equifax
Middle Credit Score 600 FICO
Co-Borrower C has the lowest middle credit of 600 FICO. So the credit scores of Co-Borrower C will be used as the qualifying credit scores for this mortgage loan application.
Purpose For Adding Non-Occupant Co-Borrowers
Non-Occupant Co-Borrowers are needed if the main borrower has no income, little income, or negative income: If the main borrower cannot qualify for a mortgage loan by themselves due to a higher debt-to-income ratio and them exceeding the maximum FHA DTI Guidelines then adding non-occupant co-borrowers is the solution.
HUD Debt-To-Income Ratio Guidelines on FHA Loans
The way how does FHA define family member is the co-borrower needs to be related to the main borrower by blood, marriage, or law. HUD will allow up to 46.9% front end and 56.9% for borrowers with at least 620 FICO Credit Scores to get an AUS Approval. Maximum DTI limits for borrowers with credit scores under 620 FICO is 43% DTI to get an approve/eligible per automated underwriting system. Any borrowers that exceed these debt-to-income ratios would need a family member and/or family members to be non-occupant co-borrowers in order for them to qualify.
FHA Family Member Definition: Gift And Donation
The FHA definition of “family member” can impact gifts or donations by requiring specific rules and requirements for gifts from FHA family members, such as documenting the gift and verifying the source of the funds. If the gift provider is not an FHA family member, the lender’s policies may vary regarding the acceptability and requirements for the gift.
If an FHA family member provides a gift to the borrower to help with the down payment or closing costs on an FHA loan, there are specific rules and requirements that must be followed. The gift must be a true gift and not a loan, meaning that the family member cannot expect repayment of the gift amount. The gift must also be documented and verified through a gift letter that includes the donor’s name, address, phone number, and relationship to the borrower, as well as the gift amount, the date of the gift, and a statement indicating that the gift is not a loan and does not have to be repaid.
The FHA also has rules regarding the source of the gift funds. The gift must come from an acceptable source, such as a family member, close friend, employer, or charitable organization. The FHA requires that the donor provide documentation showing that they have the funds to give, such as bank statements or investment account statements.
If the gift provider is not an FHA family member, the rules for accepting a gift may be more restrictive. Some lenders may require that the gift provider be a blood relative or a spouse of the borrower, while others may accept gifts from non-relatives who have a documented interest in the borrower, such as a godparent or long-time family friend. Additionally, some lenders may require higher down payment or credit score requirements if the gift provider is not an FHA family member.
Gifts or donations can influence FHA loan requirements in a few different ways. First and foremost, gifts from an FHA family member can help borrowers meet the minimum down payment requirement of 3.5% for an FHA loan. For example, if a borrower is purchasing a home for $200,000, they would need a down payment of $7,000. If an FHA family member provides a gift of $7,000, the borrower could use that gift as their entire down payment, as long as they meet the other FHA loan requirements.
Gifts or donations can also affect the debt-to-income ratio (DTI) requirement for FHA loans. The DTI is a measure of the borrower’s monthly debt payments compared to their gross monthly income, and it must be below a certain threshold for FHA loan approval. If the borrower is struggling to meet the DTI requirement, a gift from an FHA family member could help reduce the borrower’s debt load and improve their chances of being approved for the loan.
On the other hand, if the gift provider is not an FHA family member, the lender may require the borrower to meet higher credit score or down payment requirements to mitigate the risk of having a non-family gift provider. In some cases, the lender may also require the borrower to contribute a certain amount of their own funds towards the down payment, even if they receive a gift from a non-family member.
FHA Asset Documentation Guidelines
When applying for an FHA loan, borrowers are required to provide documentation of their assets. Assets include any money or property that the borrower owns, such as savings accounts, retirement accounts, stocks, bonds, and real estate.
The FHA has specific guidelines for how assets must be documented, which are known as the FHA asset documentation guidelines. These guidelines are designed to ensure that borrowers have the financial resources to meet the down payment and closing costs of the loan and to make their monthly mortgage payments.
Under these guidelines, borrowers must provide a complete and accurate accounting of their assets, including all bank statements, investment account statements, and any other documentation that shows the value of their assets. The lender will review these documents to ensure that the borrower has sufficient funds to cover the down payment and closing costs and that the borrower has a history of saving and managing their finances responsibly.
In addition to providing documentation of their assets, borrowers must also explain any large deposits or transfers that appear on their bank statements. This is to ensure that the borrower has not received any large, unexplained gifts or loans that could affect their ability to repay the loan.
The lender is responsible for analyzing a borrower’s assets as part of the FHA loan application process. The lender will review the borrower’s asset documentation, including bank statements, investment account statements, and any other documentation of assets, to determine if the borrower meets the FHA’s asset requirements.
The lender will typically look at a number of factors when reviewing a borrower’s assets, including the amount of money in savings and investment accounts, the borrower’s history of saving and managing their finances, and any large deposits or transfers that appear on the borrower’s bank statements.
If the lender has any questions or concerns about the borrower’s assets, they may request additional documentation or clarification from the borrower. Ultimately, it is the lender’s responsibility to ensure that the borrower meets all of the FHA’s asset documentation guidelines and that they have the financial resources to meet the down payment and closing costs of the loan and to make their monthly mortgage payments.
FHA Downpayment Rules
FHA down payment rules are designed to make homeownership more accessible for borrowers who may not have the funds for a larger down payment.
The FHA (Federal Housing Administration) requires a minimum down payment of 3.5% of the purchase price for a home. This means that if you’re purchasing a home for $200,000, you would need to make a down payment of at least $7,000. However, keep in mind that you’ll also need to pay for closing costs, which can add up to another 2-5% of the purchase price.
The down payment can come from a variety of sources, including savings, a gift from a family member, or a grant from a government or nonprofit organization. However, it’s important to note that the down payment cannot be borrowed, and any gifts or grants must be properly documented and verified by the lender.
In addition to the minimum down payment requirement, the FHA also has guidelines regarding a borrower’s credit score and debt-to-income ratio (DTI). A credit score of at least 580 is typically required to qualify for an FHA loan with the minimum down payment, although some lenders may require a higher score. Additionally, the borrower’s DTI (which is the ratio of their monthly debt payments to their monthly income) must be below 43%.
It’s important to note that while a 3.5% down payment may be lower than what is required for some conventional loans, the borrower will also be required to pay an upfront mortgage insurance premium (MIP) and an annual MIP, which can add to the overall cost of the loan. The MIP is required regardless of the down payment amount and helps protect the lender in case the borrower defaults on the loan.
FHA Identity Of Interest And The Definition Of Family Member
FHA identity of interest, is a term used to describe a situation in which the buyer and seller of a property have an existing relationship. This relationship can be familial, financial, or business-related, and it can impact the FHA loan requirements.
If the seller of a property is a family member of the buyer, then the transaction is considered an “identity of interest” transaction. In this case, FHA loan requirements may be stricter than for a standard transaction. For example, the down payment may be higher, and there may be additional documentation required to prove that the transaction is fair and reasonable.
FHA has specific guidelines for identifying and documenting “identity of interest” transactions. These guidelines are designed to ensure that the transaction is legitimate and that there is no conflict of interest between the buyer and seller. The guidelines require that the buyer and seller provide detailed documentation, including a sales contract, a property appraisal, and proof of the buyer’s financial ability to purchase the property.
In the case of a family member selling a property to a borrower, FHA requires additional documentation to establish that the transaction is an arms-length transaction, meaning that it is fair and reasonable and not influenced by the existing relationship. The documentation required may include an independent appraisal, a home inspection, and a second opinion from another lender.
The problem with a conflict of interest is that it can compromise the integrity of the transaction and lead to potential fraud. If a party to the transaction has a personal or financial interest in the outcome of the transaction, they may be motivated to act in a way that is not in the best interest of all parties involved, including the borrower, the lender, and the FHA. This can result in financial losses for the parties involved and can damage the reputation of the FHA program as a whole.
If there is a deliberate and fraudulent misrepresentation of a borrower’s identity of interest, it could be considered mortgage fraud, which is a federal crime punishable by fines and imprisonment. Mortgage fraud can involve a wide range of fraudulent activities, including false statements on loan applications, fraudulent documentation, and other deceptive practices designed to misrepresent the borrower’s financial situation or eligibility for a mortgage loan.
FHA Employed By Family Member
FHA loan rules for income from family-owned businesses refer to the income earned from a business that is owned and operated by the borrower’s family. According to the FHA guidelines, income from a family-owned business can be used to qualify for an FHA loan if the business meets specific requirements.
To qualify for an FHA loan using income from a family-owned business, the borrower must provide documentation that the business has been in existence for at least two years. The business must also provide tax returns for the past two years, including a current year-to-date profit and loss statement.
If the business has not been in operation for at least two years, the borrower can still use income from the business to qualify for an FHA loan. However, the business must meet specific requirements, such as having adequate capitalization and showing a strong likelihood of continued operations. The lender will also consider the borrower’s experience and qualifications to operate the business.
Once the borrower’s family-owned business has been in operation for at least two years and meets the necessary requirements, the lender will use the business’s net income to calculate the borrower’s qualifying income. The lender may also adjust the net income to account for any nonrecurring expenses or losses.
It is important to note that the FHA loan rules for income from family-owned businesses are subject to specific underwriting guidelines, which may vary from lender to lender. Borrowers should consult with their lender to determine the specific requirements and documentation needed to qualify for an FHA loan using income from a family-owned business.
Here is an example to illustrate how income from a family-owned business can be used to qualify for an FHA loan:
Let’s say John is applying for an FHA loan to purchase a home. He owns a family-owned business, ABC Company, which has been in operation for three years. ABC Company has a net income of $75,000 per year, and John’s salary from the business is $50,000 per year. John provides the lender with tax returns for ABC Company for the past two years, including a year-to-date profit and loss statement.
Based on ABC Company’s net income, the lender determines that John’s qualifying income for the FHA loan is $75,000 per year. The lender may also adjust the net income to account for any nonrecurring expenses or losses. With John’s qualifying income of $75,000, he is able to meet the necessary income requirements to qualify for an FHA loan to purchase his home.
What Is Required When A Borrower Is Employed By A Family Member?
When a borrower is employed by a family member, the FHA requires additional documentation to verify the employment and income.
The borrower must provide a current pay stub and the family member-employer must provide a written verification of employment.
The verification of employment should include the borrower’s position, length of employment, and the nature of the business relationship between the borrower and the family member-employer.
In addition, the verification of employment should indicate whether the family member-employer has any ownership interest in the borrower’s employer or if the borrower has any ownership interest in the family member-employer’s business.
The Informed Consumer Choice Disclosure Must Be Issued To An FHA Loan Applicant
The informed consumer choice disclosure must be issued to an FHA loan applicant.
The Informed Consumer Choice Disclosure is a separate requirement that must be provided to all FHA loan applicants, regardless of their relationship and if they fit or not with the FHA family members definition, or other parties involved in the transaction.
The Informed Consumer Choice Disclosure is a document that must be provided to all FHA loan applicants before they can be approved for a mortgage loan. The disclosure is intended to inform borrowers about the costs and risks associated with an FHA-insured mortgage, and to help them make an informed decision about whether an FHA loan is the right choice for their financial situation.
The disclosure outlines the following information:
- FHA mortgage insurance premiums: Borrowers must pay an upfront mortgage insurance premium (MIP) at closing, as well as an annual MIP. The disclosure provides a breakdown of these costs and explains how they affect the borrower’s monthly payments.
- The interest rate and APR: The disclosure includes the interest rate for the loan as well as the annual percentage rate (APR), which takes into account the interest rate and other loan fees.
- Closing costs: The disclosure itemizes the estimated closing costs associated with the loan, including fees for appraisal, title insurance, and other services.
- Prepayment penalties: The disclosure explains that FHA loans do not have prepayment penalties, meaning that borrowers can pay off the loan early without incurring a fee.
- Other loan features: The disclosure provides information about other loan features, such as adjustable interest rates, and the potential risks associated with these features.
The Informed Consumer Choice Disclosure is intended to ensure that borrowers have a clear understanding of the costs and risks associated with an FHA-insured mortgage. By providing this information upfront, borrowers can make an informed decision about whether an FHA loan is the right choice for their financial situation.
FHA Take Me Home
The FHA Take Me Home program was not launched finally. It was going to amplify the FHA family member definition and be more lenient with the FHA identity of interest concept. It was discarded some time ago in March, 2023.
Frequently Asked Questions (FAQ)
The lender ultimately decides whether a donor is considered an FHA family member or not. The FHA has specific guidelines regarding who is considered a family member for the purpose of providing gifts to borrowers, but it is up to the lender to determine whether a particular donor meets those guidelines. To determine if a donor is an FHA family member, the lender will typically require documentation that proves the donor’s relationship to the borrower. This may include a birth certificate, marriage certificate, or adoption papers, depending on the nature of the relationship.
If the lender approves a borrower for a loan based on inaccurate information provided by the borrower, the borrower may be at risk of defaulting on the loan if they do not have the financial resources to make their monthly mortgage payments or to cover the down payment and closing costs. This can lead to foreclosure, which can be damaging to the borrower’s credit score and financial stability. If the lender approves a borrower for a loan based on inaccurate or fraudulent information provided by the lender or due to negligence, there can be legal and financial consequences for the lender. The FHA has strict rules and regulations regarding the approval of loans, and lenders who fail to follow these guidelines can face fines, legal action, and even loss of their FHA approval.