FHA Loan Down Payment

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Homeownership rates rose 1.3% to 65.5% in 2020. This is the highest annual rise in U.S. history. If you're considering buying a home, there's so much to think about. You may be wondering if an FHA home loan is a good idea and what the minimum down payment would be. FHA loans are backed by the Federal Housing Administration and offer many benefits for home buyers. If you're interested in applying for an FHA loan, you should know the facts about FHA loans and the down payment requirements.

What Are the FHA Down Payment Requirements? 

It's possible to qualify for an FHA loan with a credit score of 500, but a low credit score will affect the minimum down payment. FHA requires a minimum down payment of 3.5% of the home's purchase price for buyers with a credit score of 580 or higher. If your credit score ranges from 500 to 579, your down payment would be 10% of the home's purchase price. For example, if the home you want is $250,000 and your credit score is 580, your down payment would be $8,750.

If your credit score ranges between 500 and 579, your FHA loan down payment would rise to $25,000.

What Cash Will I Need to Close?

You can expect to pay closing costs between 3% and 5% of the mortgage amount in addition to your down payment. This includes FHA’s up-front mortgage insurance premium (UFMIP). Using the example of a $250,000 home with a $8,750 down payment, closing costs would range between $7,500 and $12,500.  With an FHA loan, buyers must pay mortgage insurance premiums. At closing, the buyer pays 1.75% of the amount of the loan for UFMIP. For a $250,000 home, that would require an upfront payment of $4,375 in mortgage insurance premiums. UFMIP can be financed into the loan to reduce the cash needed to by your home.

Meeting the FHA Down Payment Requirements 

The FHA allows potential home buyers to accept gifts to help with the down payment amount. There are provisions in place to make this process easier. They include:

Gift Rules

The FHA gift rules make it easier for homebuyers to make a down payment on a new home. These rules are more generous than other home loan options.

Approved gift donors include:

• The homebuyer's family member
• An employer or their labor union
• A close friend with a defined interest in the homebuyer
• Charitable organizations
• Government agencies that assist low- to moderate-income families

Gifts are not allowed from individuals or organizations with a financial interest in the home. This includes:

• The seller the property
• The lender
• Real estate agents
• The builder

Seller Concessions

Homebuyers can reduce the amount of cash they must have at closing by asking for seller concessions. FHA allows the seller to contribute up to 6% of the price of the home towards closing costs.

Lower Credit Score Requirements

Compared to conventional loans, FHA home loans are more lenient in credit requirements. To qualify for a 3.5% down payment, the borrower needs a credit score of 580 or more. 

If your credit score is around 500, FHA will usually approve a loan with a 10% down payment. In comparison, you would need a credit score of at least 620 for a conventional loan with a 3% down payment. When a borrower's credit score is low, lenders may not approve a conventional loan, they may charge higher interest rates, or require a more substantial down payment.

Is there a Downside to an FHA Loan?

Before you decide whether an FHA loan is right for you, you should be aware of any potential downsides. 

The FHA Appraisal Process

The FHA standards for appraisal is more extensive than conventional loans. The standards are high and designed to ensure the health and safety of the buyer and the livability of the home.

In a seller's market, homeowners may be hesitant to accept an offer if there's a risk of the home not meeting FHA standards. In competitive markets, some home buyers who aren't going for an FHA loan may want to make contingency-free offers and bid over the asking price. FHA buyers can't waive the appraisal standards, and this can put them at a disadvantage in a bidding war.

Some Sellers Avoid FHA Loans 

Some sellers tend to avoid government backed loans, but this is changing. When home inventory is low, sellers have the advantage. They can have their pick of all-cash offers or buyers using conventional loans bidding above market value. As the housing market shifts away from a seller's market, buyers are seeing their FHA loan offers welcomed. Furthermore, FHA’s renovation loan program gives homebuyers the opportunity to submit an offer on a home that needs a bit of work. Sellers unwilling to do the home repairs prior to listing their home might consider a homebuyer with an FHA 203(k) that allows for the buyer to finance the repairs. Talk to your real estate agent about available listings for homes that need upgrading. 

FHA Loans and Down Payment Assistance

There are many down payment assistance programs (DPAs) in the U.S. Every state has at least one DPA. Some counties and cities offer their own programs as well.

Each DPA has its own set of rules. Some are specifically for first-time buyers. Others help with down payment as well as closing costs. If you qualify for a DPA, you could receive a low interest loan to help you buy a home. You could receive thousands in grants that you would not have to pay back.

FHA Loan Requirements 

FHA loans help many home buyers achieve their dreams of owning a home.

Besides the down payment and credit score requirements, what else is required?

FHA Loan Limits

In most parts of the country, you can get an FHA loan for up to $472,030 for a single-family residence. If you're in an area with above-average home prices, that could rise to as much as $1,089,300. The borrowing limit may be higher if you're in Alaska, Hawaii, Guam, or the U.S. Virgin Islands. It may also be higher if you're purchasing a residence for multiple families.

If you want to look at loan limits for your area, you can use the look-up tool on the website of the U.S. Department of Housing and Urban Development (HUD). 

Debt to Income Ratio (DTI)

Lenders consider your debt-to-income ratio in addition to your credit score and down payment. Your DTI is the percentage of your income before taxes that you spend on financial commitments, including any debt, alimony, and child support. Housing expenses are included in your DTI once the new mortgage is set. Utilities are not considered a part of your DTI. FHA guidelines for DTI are flexible. You can be approved for an FHA home loan if your DTI is as high as 55%. However, you may need a higher down payment or credit score to be approved if your DTI is this high. FHA lenders prefer a borrower's DTI to be below 50% for loan approval.

Can I Get a Loan With No Down Payment?

FHA doesn't offer a "zero down" home loan. However, there are various payment assistance options available for FHA home buyers. There is even an FHA $100 down payment program. 

Some assistance programs allow borrowers to obtain a loan without using any personal funds for down payment or closing costs.

Can I Put 20% Down on an FHA Home Loan? 

FHA requires a minimum payment 3.5% of a home's purchase price. They require 10% for lower credit home buyers. You can put down as much as you want beyond the minimum requirement. Leaving a larger down payment towards your home can help you secure a lower mortgage rate and monthly payment and can have an added benefit with the monthly mortgage insurance requirement. Unlike conventional loans, you must pay mortgage insurance with an FHA loan. That's why a conventional loan is often a better choice.

Is an FHA Loan Right for Me?

If you want a low down payment, low interest rates, and flexible credit requirements, an FHA loan may be a good option for you. FHA loans work well for those who cannot obtain a traditional loan, have a lower credit score, or have limited savings. Weigh your home loan options as well as the down payment vs closing costs. Talk to a mortgage lender you trust about whether an FHA loan is a good option for your mortgage needs.

Competitive Home Lending offers wholesale mortgage rates on FHA loans in Texas. Lower closing costs and a lower mortgage rate help to make homebuying more affordable and increase your homebuying power.