FHA Loan Down Payment Requirement: What You Need To Know
For some buyers, making a monthly mortgage payment is an affordable expense of homeownership. However, they may not have the funds available to cover a significant down payment. That’s why financing options like FHA loans were created and why many first-time home buyers decide to use them.
Let’s take a look at what down payment requirements there are for an FHA loan and what you should keep in mind when using this type of mortgage for your home purchase.
What Are The FHA Loan Down Payment Requirements?
Even though FHA loans are backed by the Federal Housing Administration, they do require a down payment, but the minimum amount will be determined by your credit score. If you have a credit score of 580 or higher, your lender will only require 3.5% for the down payment. If your credit score is lower than 580, some lenders will approve your loan with a down payment of 10%.
Since borrowers with a lower credit score are often seen as riskier, lenders will want a larger down payment to secure their investment. While FHA home loans are generally easier to qualify for because of their lower down payment and credit score requirements, it can still be difficult for some buyers to pay 10% upfront even though it’s much lower than the traditional 20%.
For example, you want to buy a home for $300,000. You think that your credit score is above 580, so your lender initially says that you only need to put down 3.5% of the purchase price. In this case, you would need to pay $10,500. Unfortunately, your lender runs your credit and sees your score is actually lower than 580. They now say you need to provide a 10% down payment, which will be $30,000.
As you can see in this scenario, it will be more challenging to find the cash for a 10% down payment than the 3.5%. This problem is why some borrowers might benefit from building their credit score before applying for an FHA loan. Note: Rocket Mortgage® requires a credit score of 580 to qualify for an FHA loan.
When Do You Have To Pay FHA Mortgage Insurance?
For a conventional mortgage, borrowers have to pay private mortgage insurance (PMI) if they put down less than 20%, but with FHA loans, you’ll need to pay mortgage insurance no matter how much you put down. This insurance coverage is necessary because FHA loans require low down payments, which, in turn, creates a bigger loan amount and increases the financial risk for lenders.
The type of mortgage insurance borrowers use for an FHA loan is called a mortgage insurance premium (MIP). This additional fee helps protect the lender in the event you default on the mortgage loan.
There are two parts of the premium you’ll need to cover for this insurance:
- Upfront Mortgage Insurance Premium: This first charge is typically 1.75% of your loan amount and will be paid with the rest of your closing costs. This fee can be rolled into the mortgage if you don’t want to pay for it upfront, but you’ll pay interest on it if you do.
- Annual Mortgage Insurance Premium: You’ll pay a yearly fee as well, but the dollar amount depends on the size of the loan, term length and your loan-to-value ratio (LTV).
Using our previous example, you would need to pay $5,250 for your upfront MIP, which means you’d need to bring at least $15,750 to close if you pay the 3.5% down payment or $35,250 if you choose to put down 10%.
How Long Do You Have To Pay FHA Mortgage Insurance Premiums?
Borrowers who put down less than 10% will have to make mortgage insurance payments over the entire life of the loan, even once they have over 10% equity in their homes. If you pay 10% or more for your down payment, you can cancel your mortgage insurance premiums after 11 years.
Some homeowners may decide to refinance their FHA mortgages to get rid of their MIP payments once they have 20% equity. This method can be especially beneficial to borrowers who have improved their credit and can now qualify for a low interest rate with a conventional loan.
Of course, you should make sure you meet your mortgage lender’s eligibility requirements for a refinance before starting this process. This step could include checking your debt-to-income ratio and FICO® score or talking to your loan officer about refinancing alternatives.
Down Payment Assistance
If you know you qualify for an FHA home loan but don’t have the means to make a large enough down payment, you still have options, like a down payment assistance (DPA) program or financial gifts from family members or friends.
DPA is any program or funding option that helps home buyers make a down payment for their purchase. Many local, state and even federal agencies offer this type of assistance as a grant, so you won’t have to pay back the money you use. Other organizations may provide loans instead, which you have to repay, but they typically have 0% interest or are forgiven after a certain amount of time.
Even though some DPA programs have strict requirements for who’s eligible, it’s worth the effort to see what organizations or local government agencies offer them in your area. For instance, the Department of Housing and Urban Development (HUD) has a list of home buyer assistance programs available across the country. You can use their database to determine what DPA programs your state offers.
Down Payment Gifts
Buyers can also use gifted money towards their down payment when using an FHA loan, but there are some rules to keep in mind.
Funds from family members, friends, employers, nonprofit organizations and labor unions are allowed. However, you can’t use contributions from a seller, real estate agent, REALTOR®, home builder or any business or professional that has a vested interest in the purchase of your home.
The Bottom Line
For some potential home buyers, funding a down payment is their primary barrier to homeownership. Thankfully, less-restrictive financing options, like FHA loans, and down payment assistance programs are available. By researching FHA loan requirements and DPA programs, you can find the best option that works for your situation.
If you’re ready to continue your homeownership journey and start the next phase of your purchase, you can fill out an online application to find out what programs you’re eligible for.