What Are The FHA Loan Down Payment Requirements?
One of the best things about FHA loan is the low down payment requirements. The minimum down payment for an FHA loan is 3.5% if you have a credit score of at least 580.
If your scores are lower than 580, FHA has options for you as well. For buyers with credit scores between 500-579 FHA loans require 10% down.
For many, the path to homeownership has one giant road block… the down payment. In fact almost half (48%) of homebuyers revealed saving for a down payment was their biggest hurdle in buying a home.
FHA loans help break down the barriers to homeownership.
A $200,000 loan with a 3.5% down payment is $7000.00. While $7,000 is likely not pocket change for most people, it’s a lot cheaper than putting 20% down.
A $200,000 home with 20% down would be $40,000. As you can see, there’s a big difference between the two.
Where Can My FHA Loan Down Payment Come From?
There are a few different places your FHA Loan down payment can come from.
Checking or Savings Accounts
This one is likely the most obvious. Money that you have set aside over time either in your checking or savings account is the most common form of down payment.
When you apply for an FHA Loan the lender is going to ask you for a copy of your most recent 60 days of bank statements.
They will review those statements to ensure that you did not borrow the money. Any large deposits entered into your account within that time frame will need to be sourced.
Borrowed funds, cash that you have saved or had laying around will not be accepted.
Your down payment can also come from any investment accounts you may have. This could be stocks or bonds, or any mutual funds.
One thing to keep in mind is that until the funds have been withdrawn, the lender will not allow you to count 100% of your balance.
Due to market fluctuations, the lender will only allow you to count about 70% of your balance. This is of course until the funds are withdrawn. Once the funds are withdrawn, you may use 100% of those funds.
401k’s and Retirement Accounts
Employer related retirement accounts are treated the same as investment accounts unless you are taking a loan against them.
The ability to borrow against your retirement accounts is a great way to pay for your down payment and/or closing costs.
Borrowing from your 401k or other retirement account will usually allow you to avoid paying withdrawal penalties and taxes.
However, it’s important to consult with your accountant and licensed investment advisor first to make sure.
If you have an employer related retirement account it may be worthwhile to see if you can take a loan to cover your down payment.
Can I Use Gift Funds for my FHA Loan Down Payment?
If you have a family member or employer that wants to help you with your down payment you can do this with gift funds.
FHA says a gift is a contribution of cash or equity with no expectation of repayment. It cannot be a loan.
Who Can Give Gift Funds?
- A Relative
- Employer or Labor Union
- A close friend with a clearly defined and documented interest in the borrower
- Charitable Organization
- A governmental agency or public entity that has a program providing homeownership assistance to low or moderate-income families or first-time homebuyers.
It’s very important that who gives you the gift is not also involved in the transaction. In other words it can’t be the seller, lender, realtor, or builder.
Learn More: FHA Gift Funds
Can I Pay FHA Loan Down Payment in Cash?
The simple answer is no. You cannot pay your down payment funds or any of your upfront costs in cash. Cash is not king when buying a home.
Cash cannot be sourced so the bank generally will not accept it. If you have cash, you need to deposit those funds into your bank account at least 60-90 days before you plan to purchase a home.
What is the Draw Back to Low FHA Loan Down Payments?
The biggest draw back to any loan program that offers low down payments is mortgage insurance. FHA has two different types of mortgage insurance.
Upfront Mortgage Insurance Premium which is 1.75% of the loan amount added into your loan.
Monthly Mortgage Insurance Premium which is 0.85% of the loan amount annually. This means if you owe $200,000 your MIP would be $1700 per year. This amount is then divided into your monthly payment over 12 months.
While paying this additional amount each month will result in an increased monthly payment, it’s still much cheaper than waiting to save for 20% down.
FHA Loan Down Payment Assistance
If you find it difficult to save for a down payment, you may be wondering if there is any down payment assistance available to you.
Down payment assistance is when an organization, bank, or lender offers to cover a portion of your down payment and closing costs.
This is usually done as a percentage fo the loan amount and can range from 4-7% of the total loan amount given to you.
There are two forms of down payment assistance:
- Silent Seconds
A silent second is a second mortgage or lien that is placed against the house you purchase. If the assistance isn’t a gift you’ll have to make an additional payment each month on the second mortgage.
If it is a gift, life grants from government agencies, it’s usually forgiven as long as you live in the home for a certain period of time.
Lender grants and other grant programs can also offer down payment assistance but instead of adding a second mortgage you get a higher interest rate.
You “pay” the grant back by taking a higher interest rate than you would have otherwise qualified for. These programs are usually offered directly by lenders and don’t involve any government agencies.
Down payment assistance programs can be helpful, but they can also add additional financial burden to you as well. It’s important to know the terms going in so you can plan accordingly.
Other Low Down Payment Programs:
FHA isn’t the only low down payment program around. There are other loan programs that allow you to purchase a home with a low down payment.
Home Ready and Home Possible:
These are conventional loans that only require you to put 3% down in order to qualify. They also offer reduced mortgage insurance and lower interest rates. However they are harder to qualify for than FHA.
If you are active duty or a veteran, you’ll want to look into VA loans. They come with a zero down payment requirement and no PMI.
VA Loans are also extremely flexible when it comes to credit and other requirements. If you are eligible for a VA Loan it will certainly be a better option for you than FHA.
The United States Department of Agriculture’s Rural Development Loan is another great program. It doesn’t require you to come up with a down payment at all and still allows the seller to pay up to 6% of your closing costs. (Which typically range between 2%-5% of your loan amount)
How to Apply for An FHA Loan
Applying for an FHA Loan is simple:
2. Speak with one of our licensed loan experts
3. Review your completed application