Forgivable Loan for First Time From Employer

[Bill F.]

Looking for the loan experts on BP to answer a mortgage question.

The company my wife works for has a program where they give first time home buyers money toward their down payment in the form of a forgivable loan. The company wires the funds directly to the closing attorney's escrow account and the employee pays the taxes out of their paycheck.

Recently an employee, who had enough money for a traditional 20% down payment, had mortgage broker tell them that they would need to use and FHA loan vice a conventional 20% down loan in order to get the funds. Their concern is that with an FHA loan the PMI (upfront and annual) makes this offer from the company less attractive. This program has existed for a few months and this is the first time a broker has brought this up.

My gut feeling is to take the FHA loan using the funds from the company, pay the upfront PMI (which is way less than the company's loan), make my first mortgage check have a principal payment that brings me over the PMI threshold, and then request PMI cancellation. However, I know that's a rough around the edges answer and wondering:

-Where does a forgivable loan fall in the gift/loan spectrum of underwriting?

-Who is correct, this broker, the other loan brokers, both, none?

-How would you handle this situation?

Thanks for your help.

[Chris Mason]

Originally posted by @Bill F.:

Recently an employee, who had enough money for a traditional 20% down payment,  had mortgage broker tell them that they would need to use and FHA loan vice a conventional 20% down loan in order to get the funds. Their concern is that with an FHA loan the PMI (upfront and annual) makes this offer from the company less attractive. This program has existed for a few months and this is the first time a broker has brought this up.

 I think that is a lender-specific overlay. FHA loans are higher profit, so some places make their LOs shove everyone using any form of down payment assistance into FHA, the idea being that generally these folks aren't sufficiently sophisticated that the consumers will understand the difference. I really don't like that and wouldn't work at a place that does that, but that's just me.

Here are the stock Fannie Mae guidelines on down payment assistance from an employer. There are jumbo lenders that follow this nearly verbatim, as well.