Can I receive a loan from a family member rather than a gift?

FHA will insure a first Mortgage on a Property that has a second Mortgage or lien held by a Family Member, provided that:
  • the secondary financing is disclosed at the time of 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 deposit or other Borrower costs 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 secondary financing amount must not exceed 100 percent of the Adjusted Value;
  • the second 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 Federal Regulation 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 loan instruments.
If the secondary financing funds are being borrowed by the Family Member and documentation from the bank or other savings 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.
 
For additional information see:

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.


Topic Number: KA-04269