Down Payments for FHA Loans

One of the major hurdles that keeps families from purchasing a home is the need for a down payment. Many potential homebuyers are worried that they do not have sufficient funds saved to put down on a home, and they worry that it could mean higher interest rates or being disapproved for a mortgage altogether.  

The FHA’s goal is to offer more homebuying opportunities to low- and moderate-income Americans. With that in mind, the FHA has set more easily achievable down payment requirements for borrowers. 

FHA Down Payment Requirements 

When it comes to FHA loans, the most attractive feature for first-time homebuyers is the low-down payment requirement. According to the HUD Handbook 4000.1, borrowers with a credit score of at least 580 must put down a minimum of 3.5% of the purchase price or appraised value of the home, whichever is less. If the borrower’s credit score is between 500 and 579, this requirement is raised to a 10% minimum down payment. 

It is important to note that despite the FHA’s criteria, lenders can set their own, additional guidelines, which might include higher down payment or credit score requirements. Lenders can set these “overlays” since they are the ones taking on the risk of the FHA loan.  

There is always a chance that borrowers cannot afford the 3.5% upfront payment. The good news is that the FHA allows down payment “gifts.” According to HUD Handbook 4000.1, a gift is considered “contributions of cash or equity with no expectation of repayment.” This allowance lets you use funds received from approved third parties toward your down payment if there is no repayment obligation.  

The FHA down payment gifts can be provided by family members, employers or labor unions, charities, or governmental agencies with Down Payment Assistance programs aiding low- or moderate-income families. 

What You Should Know About Down Payment Assistance Programs 

As a borrower, you should know that there are many state and local agencies that provide Down Payment Assistance to potential homebuyers who demonstrate a need. These programs have their own eligibility criteria, and may be awarded to applicants based on income level, credit scores, occupation, etc. Many programs are exclusively for first-time homebuyers (defined as people who have not owned a home in the previous three years). Some are grants, and others are second mortgages with deferred-payment terms. 

HUD rules state that anyone with a financial stake in the loan or its outcome may not offer any kind of down payment assistance. Sellers are, however, allowed to make “seller concessions,” up to 6% of the purchase price of the home that go toward the closing costs. Keep in mind that closing costs cover any expenses requiring cash to close that is NOT part of the down payment.  

While there are several options available for down payment assistance, your lender and seller are not obligated to help you find, apply for, or secure any assistance funds. It falls on the borrower to find these programs should they have the need. FHA.com has done some of the legwork by compiling a list of Down Payment Grants for first-time and repeat homebuyers. 

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