Down Payments for FHA Loans
February 24, 2022
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.
------------------------------
RELATED VIDEOS:
Keep Your Eyes on Your Loan Balance
Learn About FHA Loan Prepayments
Taking Out a Home Loan Makes You a Borrower
FHA Loan Articles
April 30, 2025 In a previous post, we discussed why FHA borrowers should carefully consider whether paying for discount points truly serves their best interests, focusing on factors like short-term homeownership, opportunity cost, FHA mortgage insurance, and the prevailing interest rate environment. Discount points are an option for borrowers willing to pay a fee to lower the interest rate by a set amount. This is not right for all borrowers, and you don't want to pay for points you won't benefit from during the loan term.
April 29, 2025Are you considering buying a home with an FHA loan? You'll likely talk to your participating lender about FHA loan "discount points" – fees you pay upfront for a lower interest rate on your mortgage. The idea behind discount points is a straightforward exchange: you spend money today to reduce your interest rate. Typically, one point equals one percent of your total FHA loan. In return, your interest rate might decrease by an amount you and the lender agree upon.
April 28, 2025Home loans have various expenses that aren't apparent to a new borrower until much later in the process. What do you need to consider when making your home loan budget? It might not be complete without addressing some of the issues we cover here.
April 23, 2025 While the prospect of lower interest rates or more favorable loan terms can be enticing, there are situations where waiting is the better option. Refinancing without carefully considering your current financial circumstances is never a good idea, but careful planning in the current financial environment is even more important.
April 22, 2025First-time home buyers worry about loan approval, but there are important steps to take to increase the likelihood that the lender will approve their application for the loan or pre-approval. What do you need to know before you choose a lender?
