FHA loan down payment requirements

FHA loans are mortgages insured by the Federal Housing Administration (FHA). They come with more flexible eligibility guidelines than conventional loans, including low down-payment requirements that make them especially attractive to first-time homebuyers. Read on to learn about FHA loan down payments and other costs to consider with this type of mortgage loan.

What is the minimum down payment for an FHA loan?

The minimum FHA loan down payment requirement for FHA loan borrowers is either 3.5% or 10% of the home’s purchase price, depending on your credit score.

Say you’re buying a $400,000 house and using an FHA loan to fund the purchase. If you have a credit score of 620, you can put just 3.5% down, which amounts to $14,000. However, if your credit score is 560, you’ll need to put at least 10% down, which equals $40,000.

Funds that can go toward an FHA loan down payment

In addition to saving up your own money, other types of funds can be used to compile your FHA loan down payment.

Down payment gift rules

FHA borrowers may use gift funds toward a down payment and closing costs. Gift funds for an FHA loan may come from:

• Family members
• Close friends
• An employer
• A labor union
• Nonprofit organizations

You cannot use gift funds from any “interested party,” such as the homebuilder, the seller or your real estate agent or broker. If you decide to use gift funds, your mortgage lender will likely require you to submit a gift letter.

FHA loan down payment assistance

Along with gifted funds, you can also apply down payment assistance to your FHA loan. There are many assistance programs out there, including through nonprofits, lenders and the government. For instance, some state Housing Finance Agencies (HFAs) package assistance with first-time homebuyer loans.

Other programs, including ones run by lenders, offer grant money that you can use toward your FHA down payment.

Additional considerations for FHA loans

The minimum down payment requirement isn’t the only factor to think about when you start looking for an FHA loan. These loans can only be used for a primary residence (not a second home or rental property), and your debt-to-income (DTI) ratio — which measures your income against how much debt you have — must be no more than 43% (or 50% in some cases).

Along with the down payment, you’ll also need to budget for:

• FHA mortgage insurance premiums (MIP): MIP comes in two forms: upfront and annual. Your lender will charge you an upfront fee of 1.75% of the loan amount when you close (you can finance this into the mortgage). You’ll also be charged an additional annual premium, which ranges from 0.15% to 0.75% of the loan amount, depending on your down payment and other factors. This fee is paid in monthly installments.
• FHA closing costs: Typically, closing costs for these loans total between 2% and 6% of the home’s purchase price.

Other low-down-payment mortgages

FHA loans are not the only type of mortgages that have low or no down-payment requirements. Alternatives include:

• 3% conventional loans
• 1% loans (some lenders offer programs that contribute the additional 2% via grant funds and other sources)
• No-money-down VA loans for eligible members of the military and veterans
• No-money-down USDA loans for borrowers in eligible rural areas

Frequently asked questions

• Why is the FHA loan down payment requirement more flexible than other loans?

  FHA loans are backed by the federal government — FHA stands for Federal Housing Administration — which makes lenders more willing to offer them to first-time homebuyers and other borrowers who may struggle to qualify for a conventional mortgage. Apart from the lower down payment requirements, FHA loans also feature more relaxed credit guidelines than traditional home loans.

• Can I get seller concessions with an FHA loan?

  Yes. If you take out an FHA loan, the seller is allowed to contribute up to 6% of the home’s sales price in concessions. For example, if you buy a home for $300,000, the seller can offer up to $18,000 in concessions. You will not receive cash directly; concessions are applied to the closing costs of your sale.

• Can I use personal loans for the FHA down payment?

  No — generally, mortgage lenders will not allow you to use a personal loan for an FHA down payment. You’ll need to use your own funds, gift money or down payment assistance.