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We’ve been discussing FHA home loan down payment sources and the rules that govern them. FHA mortgage loan rules in HUD 4000.1 have strict requirements when it comes to the sourcing of down payments; since most FHA forward mortgages require a down payment, the rules in this area are very important to know ahead of your loan application.

FHA Loan Down Payment Source Rules: Retirement Funds

FHA loan rules permit the borrower to use retirement funds as a source of down payment money. According to HUD 4000.1:

“The Mortgagee may include up to 60 percent of the value of assets, less any existing loans, from the Borrower’s retirement accounts, such as IRAs, thrift savings plans, 401(k) plan, and Keogh accounts, unless the Borrower provides conclusive evidence that a higher percentage may be withdrawn after subtracting any federal income tax and withdrawal penalties.”

Any funds that remain above and beyond what is needed for the down payment may be counted as “cash reserves” for the purpose of loan approval.

FHA Loan Down Payment Rules: Documenting The Retirement Fund Contributions Toward The Down Payment

Like other down payment sources, retirement funds must be properly documented. FHA loan rules state that the lender needs official paperwork from the financial institution documenting the existence and use of the funds:

“The Mortgagee must obtain the most recent monthly or quarterly statement to verify and document the existence and amounts in the Borrower’s retirement accounts, the Borrower’s eligibility for withdrawals, and the terms and conditions for withdrawal from any retirement account.”

This portion of the FHA loan rulebook adds, “If any portion of the asset is required for funds to close, evidence of liquidation is required.”

The paper trail for use of these funds in the down payment is an FHA requirement, but your lender may have additional rules or regulations above what’s listed in HUD 4000.1.

Discuss the use of retirement account funds with your loan officer to learn what might be needed in addition to what the FHA requires. FHA loan rules do not include all possible scenarios in all housing markets, your experience may vary.

FHA home loan rules also have no say in what penalties, fees, or costs may be associated with dipping into a retirement account for down payment purposes. Borrowers should know what those costs might be prior to committing to using the retirement funds for home loan down payment purposes.

State law, lender requirements, and other factors may apply.