Everything To Know About FHA Down Payment Assistance
FHA loans can be a great resource for those who may be able to afford a home but have past blemishes or are building credit. But even if you can afford the monthly expense and qualify, the upfront investment in a home can be a significant hurdle. While there is no such thing as FHA down payment assistance, you can use down payment assistance to get an FHA loan.
FHA Loan Down Payment Assistance, Explained
Before we go any further, let’s get some basics about both FHA loans and down payment assistance out of the way.
What Are FHA Loans?
FHA loans are backed by the Federal Housing Administration. These loans are intended to open up homeownership to borrowers who may not otherwise qualify for a conventional mortgage due to their credit score or the amount of debt they need to carry after buying a home. The requirements are designed to be more flexible than many other options.
FHA will allow you to get a mortgage with a qualifying FICO® Score of 500 or higher if your down payment is 10% or more. It’s important to note that your rate might be higher based on your credit score being so low. Not every lender offers these loans. Most lenders offer them once you reach a median credit score of 580. You only need a 3.5% down payment at this level.
In addition to the more flexible credit score guidelines, you may be able to qualify with a slightly higher debt-to-income ratio (DTI) than you would on other mortgages offered. This might allow you to qualify for a home with a higher monthly payment to get the extra space you need or make a more competitive offer in your area.
What Is Down Payment Assistance?
Down payment assistance is funding intended to help bring down the upfront cost associated with buying a home. Despite being referred to as down payment assistance, it can be used to cover closing costs as well. This is important because these can represent 3% – 6% of the purchase price on a typical transaction, in addition to the down payment.
Down payment assistance comes in many forms, including both grants and loans. The ideal buyer to look into this is someone who can afford the monthly payment on a home but needs assistance coming up with the money to close on the home and get the keys.
Can You Get Down Payment Assistance With An FHA Loan?
The FHA itself doesn’t fund a down payment assistance program, but you can use down payment assistance from various sources to qualify for an FHA loan.
Types Of FHA Down Payment Assistance
Down payment assistance comes in many different forms. Let’s walk through several of the major structures.
Grants are in many ways the best form of down payment assistance you can get. The reason is it’s the only form of down payment assistance that you don’t have to pay back under any circumstances. It’s free money.
You can also get down payment assistance that’s in the form of a loan. However, the terms of repayment can vary depending on the type of down payment assistance loan you get.
- Low-interest loans: Some down payment assistance providers offer assistance in the form of regular loans, which may be available at lower interest rates than you can get on the marketplace. Because repayment on the loan starts immediately after your home closes, your lender is likely to include this in your DTI.
- Deferred down payment assistance loan: In this arrangement, the repayment of your loan is delayed for some time. Some down payment assistance providers may wait a certain number of years before repayment begins. In other instances, the loan comes due after a certain event happens – commonly refinancing, selling the home or otherwise paying off the mortgage.
- Forgivable loan: Forgivable loans don’t need to be paid back assuming certain conditions are met. For example, a down payment assistance provider may require that you use the home as your primary residence for a certain number of years. In other circumstances, employers may require you to maintain employment with them for a certain number of years after receiving your assistance.
No matter what type of loan you’re getting, make sure you understand the terms of the loan including the interest rate and whether repayment will be due all at once or if you have a certain term to pay it off.
Individual Development Accounts (IDAs)
Individual Development Accounts are special bank accounts offered by participating lenders that allow low-income families to have their savings matched toward a goal that helps them achieve financial independence. One of those goals can be the purchase of a first home.
One other benefit of these accounts is that they may not affect your ability to qualify for other programs like Supplemental Security Income.
Matched Savings Programs
Functionally, matched savings programs are identical to IDAs. However, matched savings programs aren’t state-supported. Instead, these may be offered by financial institutions in order to encourage people to open up savings accounts with them.
Where To Find FHA Loan Down Payment Assistance
There are many good places to find down payment assistance. However, it’s also important to make sure you speak with your lender about the types of down payment assistance they take. Not all lenders accept every program.
It’s also important to consider which programs you may qualify for. Many down payment assistance programs are designed to serve first-time home buyers or low- to moderate-income borrowers. Be sure you understand the market the program is trying to serve.
Beyond that, there may be other requirements like a check of your finances or credit. Be prepared to share information such as pay stubs, W-2s, 1099s, tax returns and bank statements. The good news is you’ll likely already be gathering this for your mortgage lender.
County, City And State Programs
One of the first places to look is at the local and state government level. Programs may be offered directly by the governments or through local housing finance agencies set up for the purpose of offering these programs. The idea here is that it can be used as an incentive to attract home buyers to the area.
One note of caution is that at the state level, it’s often required that you work with one of their approved lenders. This can prevent you from shopping around for the best rates and terms that may otherwise be available to you.
A mortgage lender may offer a down payment assistance program of its own. Even if it’s not referred to as down payment assistance, it may be a grant or other contribution toward the loan to help you qualify. If you get a loan through one of these programs, the advantage is that you know the lender will accept it if you meet the other qualifications.
Knowledgeable Real Estate Agents
If you’re working with a good real estate agent, that person is going to understand your financial situation as well as anyone else while you’re going through the process of buying a house. They can help you find down payment assistance programs you may qualify for to help with your FHA loan qualification.
The HUD Directory
The Department of Housing and Urban Development (HUD) maintains a list of local home buying resources. While this includes homeownership counseling services, down payment assistance programs are also listed.
Consider Gift Funds
Gift funds aren’t strictly considered down payment assistance, but it may be a good option if you’re looking for a way to fund your down payment and closing costs. Most loan options allow you to receive a gift from various family members. However, the FHA expands this list by adding the following:
- Charitable organization
- Labor union
- Governmental agency or other public entity that provides homeownership assistance
The Bottom Line
The FHA doesn’t provide down payment assistance of its own, but down payment assistance may be used to fund the down payment and closing costs on an FHA loan. Down payment assistance comes in many forms, including loans, grants and matched savings programs. If you get a loan, make sure you’re fully aware of the terms and conditions for repayment.
If you’re feeling confident and you’re ready to get started, apply for a mortgage online.