A Guide To FHA Loan Down Payment Requirements

Buying a home is a process that involves many stages. Of all the steps to homeownership, the down payment is one of the most significant parts in getting a loan. This initial payment on your home covers a part of your purchase price, but also may impact the loan amount you can borrow – which is why down payments can make all the difference for your loan approval.

To save on your down payment, you may want to look into a government-backed loan like an FHA loan. FHA loans can benefit eligible borrowers, as the loan requirements are less stringent and allow borrowers to put less money down.

In this article, we’ll further discuss this type of loan, paying special attention to the down payment requirements you must meet to qualify for one.

FHA Loans: A Definition

The FHA loan was established under the National Housing Act of 1934, at a time plagued by a high rate of default and foreclosures due to the Great Depression. FHA loans created more affordable housing for aspiring homeowners om a time when housing was nearly unobtainable. According to the U.S. Department of Housing and Urban Development (HUD), only 1 in 10 households owned homes at the time.

The Federal Housing Administration, also known as the FHA, is a federal agency within HUD that provides insurance for FHA-approved loans. An FHA loan is a government-backed home loan that helps home buyers qualify for housing by offering lower credit score requirements, closing costs, down payment fees and interest rates.

You can only get an FHA loan if an FHA-approved lender issues it because the FHA backs the loan. In other words, they promise to pay a portion of your mortgage to your lender if you stop making payments.

FHA loans are available for multiple types of properties, including manufactured homes, FHA-approved condos, single-family homes and more.

What Is The Minimum Down Payment For An FHA Loan?

The minimum down payment requirement for an FHA loan is typically 3.5% of the sales price, but that depends on a number of things, including your credit score and whether you’re buying or refinancing. Most mortgage lenders will require that you have a FICO^Ⓡ Score of 580 in order to qualify for an FHA loan. However, a lower credit score doesn’t automatically disqualify you from getting the loan. For instance, FHA lenders may approve a borrower even if their FICO^Ⓡ Score is between 500 and 579 – they’ll just be expected to make a 10% down payment on the loan.

How Your Down Payment Impacts Loan Limits And Mortgage Insurance

A borrower’s down payment can influence the amount of money they’re allowed to borrow and the amount they’ll pay for their mortgage insurance. These factors will affect a borrower’s loan costs in various ways.

FHA Loan Limits

The FHA has a set amount that it will back, and it’s known as the FHA loan limit. Once you exceed this limit, you must pay the difference, which would make up all or part of your down payment.

FHA limits vary on location and the type of mortgage you choose. These limits are determined based on the current year’s conforming loan limit for conventional loans. Sometimes it may be better to purchase a property in a different area because of the loan limit. Certain counties may have lending limits that are higher than others.

Private Mortgage Insurance (PMI)

Because the FHA backs this loan, lenders will mandate that borrowers pay private mortgage insurance. This type of insurance protects lenders from loss – it pays the lender in case you default on your home loan.

Mortgage insurance will become part of your monthly mortgage payments, and you’ll pay it for the life of your loan, unless you make a down payment of more than 10%. If you do make a payment of more than 10%, you’ll still have to pay MIP, just for 11 years rather than the entire loan term.

It’s important to understand that lenders also require you to pay two mortgage insurance premiums. You’ll pay one premium upfront at closing and pay the other one monthly. The upfront MIP fee is 1.75% of your loan amount, and the monthly payment after that is based on a annual percentage that varies with your loan amount and term length, usually between 0.45% – 1.05%.

Down Payment For FHA Requirements: Accepted Source Of Funds

The FHA has specific rules that borrowers must follow concerning where the money for their down payment comes from. If you don’t follow these guidelines, you could disqualify yourself from the loan process.

The FHA won’t allow you as a borrower to use a payday loan, credit cards or a cash advance to make a down payment because they don’t want your debt to increase more than it already has. Your down payment can be comprised of gift money, but it must be a “no strings attached gift” that you don’t have to repay to anyone later.

The FHA permits down payment funds from the following approved sources:

• Checking and savings accounts
• Gifts
• Cash
• Stocks
• Bonds
• Investment funds
• Grants

When Do You Need To Make Your Down Payment?

Down payments must be paid on the closing date, the day the sale is finalized. Depending on the deal, buyers may also make an earnest money deposit prior to closing, a deposit given to the seller showing that you’re serious about purchasing the home.

It's important to understand that the earnest money deposit may go toward part of the down payment, but they aren’t the same. The amount you spend on your down payment and earnest money is deducted from the home’s purchase price, and the remaining portion will go into your loan.

What Other Low-Down Payment Loans Are Available?

Some borrowers may opt for FHA loans due to their low down payment requirement, but these loans are not always the best option for everyone. There are some alternative loans that offer low down payment requirements or no down payments at all:

• VA loan: A mortgage loan insured by the U.S. Department of Veterans Affairs (VA) for military service members, veterans, and their surviving spouses. VA loans require no down payment or mortgage insurance.
• USDA loan: A mortgage loan insured by the U.S. Department of Agriculture (USDA) that offers lower interest rates and no down payment requirement for eligible borrowers.
• Conventional loan: One of the most common types of mortgage loan, a conventional loan is purchased and sold by Fannie Mae and Freddie Mac. These loans offer rates on par with the market and a minimum down payment of 3%.

How To Find Down Payment Assistance Programs

If you’re unsure whether you can afford a down payment, remember that down payment assistance is available. Most states offer various assistance programs for eligible borrowers. You can find down payment assistance from the following entities:

• Your state’s housing finance authority
• City and county government
• U.S. Department of Housing and Urban Development (HUD)

The Bottom Line

FHA mortgages benefit borrowers because they permit lower down payment and credit score requirements, making upfront costs more affordable. A drawback of this benefit is that lenders will require you to pay a mortgage insurance premium, which creates monthly expenses you’ll then endure over the life of the loan unless you made a large down payment upfront.

As is the case with any loan, you’ll want to do your research to determine whether an FHA loan is right for you and your financial situation. Looking to take the next step? Contact a Home Loan Expert to get started today.