FHA Loan Down Payment Requirement

FHA loans, insured by the Federal Housing Administration (FHA), offer more flexible eligibility criteria and require a low down payment. If you’re contemplating an FHA loan, understanding the down payment requirement and associated costs is crucial.

What is the minimum FHA loan down payment?

FHA loans, backed by the Federal Housing Administration (FHA), offer flexible eligibility criteria and require a low down payment. If you’re thinking about an FHA loan, here’s what you should understand about the down payment requirement and additional costs.

For a home priced at $300,000, the down payment ranges from $10,500 at the minimum to $30,000 at the maximum.

How to save for an FHA loan down payment

To start saving for a down payment on an FHA loan, begin by setting clear goals. Consider the following steps:

• Determine your homebuying budget: Calculate how much you can afford to spend on a home.
• Set a timeline for purchasing a home: Decide when you aim to buy your home.
• Develop a savings strategy: Outline how you will save for the down payment.
• Assess your current savings: Determine how much you already have saved.
• Explore potential contributions: Consider if family or friends might contribute to your down payment.

You can accelerate your savings by reducing expenses or using money-saving tools and apps. Remember, you don’t have to cover the entire 3.5% (or 10%) down payment alone. FHA loans allow you to use gifted funds towards your down payment. Here’s how it works:

FHA loan down payment gifts and rules

Gifted funds for down payments typically originate from friends, family members, labor unions, employers, or nonprofit organizations. However, it’s important to note that FHA loans restrict the use of gifted funds from certain sources, including:

• The home builder
• The home seller
• Your real estate agent or broker
• Anyone else with a financial interest in the home sale

Using gift funds can assist prospective homeowners who might otherwise struggle to purchase a home. If you opt to use gift funds, your mortgage lender may request a gift letter as part of the documentation process.

FHA loan down payment assistance

In addition to using gifted funds, you can also utilize down payment assistance for your FHA loan. Various assistance programs are available through nonprofits, lenders, and governmental entities. State housing finance agencies (HFAs), for example, often combine assistance with first-time homebuyer loans.

Qualifying for an FHA loan

While specific criteria may vary among lenders, several requirements must generally be met to qualify for an FHA loan:

• The property must serve as your primary residence.
• You need a minimum credit score of at least 580 (or 500 if you can make a 10 percent down payment).
• You must make a minimum down payment of 3.5 percent (with a credit score of at least 580).
• Your back-end debt-to-income ratio should not exceed 43 percent (though it can go up to 50 percent in some cases).
• You are required to pay an upfront Mortgage Insurance Premium (MIP) of 1.75 percent of the loan principal.

Additional cost considerations for FHA loans

In addition to the down payment, you’ll also need to budget for the following when considering an FHA loan:

• FHA Mortgage Insurance Premiums (MIPs): MIPs are divided into upfront and monthly payments. Your lender will charge an upfront fee at closing, which can be financed into the mortgage. Monthly premiums are also added to your mortgage payment. The amount and duration of these premiums depend on your down payment and other factors.
• FHA Loan Closing Costs: Generally, FHA closing costs range from 2 percent to 6 percent of the home’s purchase price.

Other low-down payment mortgages

Other mortgage options with low or no down payment requirements include:

• Conventional loans with 3 percent down payment
• VA loans with no money down for eligible military members and veterans
• USDA loans with no money down for borrowers in eligible rural areas