FHA Downpayment Guide
If you are interested in a Federal Housing Administration loan to buy a home, you may be wondering if you need to make a down payment. The short answer is yes, but the size of your down payment will depend on a variety of factors. It may even be possible to qualify for down payment assistance in some states and localities.
What Is an FHA Loan?
FHA loans are offered by the federal government. These loans are geared towards first-time home buyers and those with limited funds. The loan program is extremely popular and offers benefits such as flexible credit qualifications, low down payment requirements, and relatively low mortgage rates.
There is a limit on how much you can borrow from the government. If you reside in a state or urban area with a high cost of living, you can qualify for a larger sum. You may also be able to qualify for a larger sum if you intend to live in Alaska or Hawaii.
How Does Your Credit Score Impact Your Down Payment Size?
The size of your down payment is directly related to your credit score. You may be able to qualify for an FHA loan with a credit score as low as 500. However, as with other types of loans, the lower your credit score is, the more money you will need to put down. If your credit score is greater than 580, you may only need to put 3.5% down. If your credit score is 579 or below, you may need a down payment of 10%.
When calculating your credit score, the following factors are considered:
How much of your credit is utilized
The type of credit you have
Whether you pay bills on time
How much you own on credit cards
How much recent credit you’ve acquired
Before applying for an FHA loan, it is wise to check your credit score.
What Are Approved Down Payment Sources?
The FHA mandates that down payments can only come from certain sources. For example, if you borrow your down payment from a family member, you will need to submit a letter stating the money is a gift, not a loan. You may obtain down payment funds from the following sources:
Cash, saving, and checking accounts
Loans and grants
Employer assistance
Investment funds
Gifts
Cash from the sale of real estate or personal property
To prevent home buyers from going into even further debt, making a down payment with a payday loan, cash advance, or credit card is prohibited. You are also prohibited from obtaining a down payment from a charitable organization that offers monetary gifts to pay off certain types of debts. You can, however, obtain money for your down payment from a charitable organization that specializes in offering homeownership assistance to first-time buyers or lower-income individuals.
In addition to those regulations, the FHA will not allow home buyers to use money from a third party, such as a builder, developer, or real estate agent, toward a down payment. These parties, however, can contribute to your closing costs (up to 6% of the sale price of the home). Any money that exceeds 6% of the sale price of the home is considered an “inducement to purchase” and therefore prohibited.
The lender you choose will need to document and verify the amount of your down payment and all the sources of your funds. If you use your own money to make a down payment, you will need to prove your funds are from your savings.
How Much Can You Put Down?
If you choose, you can put more than 3.5% or 10% down on a home. The FHA allows borrowers to put as much down as they wish, and putting a larger sum down may qualify you for lower monthly payments and a lower interest rate. It is important to note, however, that even if you put up a sizeable down payment, you will still be required to purchase mortgage insurance, unlike with a conventional loan.
Where Can You Find Down Payment Assistance Programs?
Getting enough money for a down payment can be a daunting task for many people. Even saving 3.5% of the cost of a home can be difficult for those on a limited budget. Many organizations, states, and local governments are aware of these difficulties and offer down payment assistance to those who qualify. Down payment assistance programs vary from state to state and locality to locality, so you may want to research assistance programs in your area first.
Often, down payment assistance programs are offered to encourage individuals in a certain area to buy homes and revitalize the local economy. The U.S. Department of Housing and Urban Development provides a website where you can look for down payment assistance programs in your state.
What Are Mortgage Insurance Premiums?
When calculating how much you should put down, you must keep the cost of your mortgage insurance premium in mind. The FHA requires borrowers who put less than 20% down on a home to pay mortgage insurance premiums. These additional payments are required because banks and financial institutions are assuming more of a risk since the borrower made a low down payment. Simply put, the financial interests of a lender can be put at stake if a borrower defaults (fails to make payments) on their loan.
If you qualify for an FHA loan, you will need to choose one of the two premium options:
Annual mortgage insurance premium: A monthly premium amount that varies based on the term of the loan, loan amount, and loan-to-value ratio.
Upfront mortgage insurance premium: An upfront amount of 1.75 of the loan that is paid when the home buyer gets the loan. This amount can also be incorporated into the mortgage.
You will have the opportunity to choose the option that best suits your budget and finances. The lender will require you to pay an insurance premium for the life of your FHA loan.
Learn More About FHA Loans
If you are interested in an FHA loan, FHA Insider is the place to go. We can provide you with in-depth information about various loan types and their qualification standards. Visit us today to learn more.
