What You Need to Know About Your FHA Loan Down Payment
An FHA loan is a Federal Housing Administration mortgage issued by qualified banks and credit unions, backed by the government. FHA loans are popular because people that don’t qualify for conventional loans may be approved for these, including first-time home buyers.
FHA loans are for everyone, but specifically good for those who are unable to make a large down payment yet have good credit. They’re also used by people who may want to keep funds in their account in case of emergency or who may have a low credit score.
Let’s find out what you need to know for the FHA loan down payment!
If you have a credit score of at least 580, an FHA loan will allow for 96.5% of the value of the home to be borrowed. On the other hand, if you have a lower score, a down payment of 10% will be required.
By contrast, a conventional loan requires a credit score of at least 620, and the down payment will likely be higher.
You can have a credit score as low as 500, however, if there is no credit history, don’t worry. A lender can look at payment histories like rent, cable, or utility bills.
Also keep in mind that the lower your credit score, the higher your interest rate will be.
Unfortunately, other up-front costs like a home inspection and closing costs do not count toward the down payment. Borrowers also must pay mortgage insurance in case of non-payment or default on the loan.
There are two types of mortgage insurances, both of which are needed for an FHA loan. One is the Upfront Mortgage Insurance Premium, and is a one-time payment of 1.75% of the value of the home. The other is an Annual Premium that is figured into your monthly house note.
A seller allowed to offer money toward closing but CANNOT contribute to a down payment, as this must be paid by the buyer.
As mentioned above, the buyer must put up the down payment. However, there is a way around that. Your friends or family, or even employer, church, or other approved organization can gift you the entire amount of your FHA loan down payment by gifting you the money.
However, there are three things you must do in order to ensure the gift isn’t coming from anyone who could benefit from it (like the realtor or seller.)
1. Acquire a “gift letter” from the giver stating the amount and that there is no expectation of repayment.
2. Document the transfer of funds–a deposit receipt is fine.
3. Obtain a recent statement of the giver’s account showing there was money to give.
A great thing to keep in mind about FHA loans is that you don’t necessarily have to put down the minimum, you can always put more towards the down payment to lower your monthly note.
FHA Loan Down Payment: Get Started
FHA loan down payments are pretty easy to navigate if you check off what’s needed with your credit (and even easier if you have it gifted!) If you need more help with this information, check out our list of FHA guidelines for income and credit requirements.