How much is an FHA loan down payment?
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When you start comparing home loan options, you’ll start to notice a number of acronyms – APR, ARM, LTV and DTI to name just a few. One of the acronyms that might be new to you is FHA, which stands for the Federal Housing Administration – a government agency that has been around since 1934 to help more Americans become homeowners.
One of the Federal Housing Administration’s best-known initiatives are its FHA loans, essentially a type of mortgage. However, the government isn’t actually loaning you the money to buy a home. Private lenders use the FHA’s standards, which include lower credit scores and low down payments, to help prospective homebuyers secure financing. These mortgages are insured by the FHA against borrower default — which mitigates the risk for the lender, encouraging them to extend a loan to an applicant they might not normally consider.
What is the minimum down payment on an FHA loan?
The minimum FHA loan down payment is either 3.5 percent or 10 percent of the home’s purchase price, depending on your credit score. For anyone with a credit score of 580 or higher, 3.5 percent is the minimum required for a down payment. Anyone with a credit score of 500 to 579 will have to have 10 percent for a down payment.
For a $300,000 home purchase, depending on your credit score, that’s $10,500 down at the low end and $30,000 at the top, which is a “significant swing,” notes Jackie Boies, a senior director of housing and bankruptcy services for Money Management International, a Sugar Land, Texas-based nonprofit debt counseling organization.
“Many borrowers select an FHA loan because they are easier to qualify for, allowing for a lower credit score and some credit history blemishes,” Boies says.
FHA loans are often a good fit for first-time homebuyers because down payments and minimum credit scores tend to be lower than those for conventional mortgages, helping borrowers buy a home sooner.
“They tend to have interest rates that are competitive with loans that are out of reach for some borrowers,” Boies says.
How to save for an FHA loan down payment
If you’re trying to come up with the cash for a down payment on an FHA loan, your savings strategy starts just like any other loan: Set a goal for how much you’re going to need, and cut your expenses everywhere possible so you can reach it faster. It’s important to note that 3.5 percent in cash down is going to look a lot different if you’re trying to buy a $250,000 home or a $400,000 home, so use Bankrate’s down payment calculator to get a sense of the sort of lump sum you’ll need. Additionally, make sure you’re familiar with the maximum amount you can borrow with an FHA loan, which varies by location and gets adjusted annually. In most places throughout the U.S., the limit is $472,030. However, there are exceptions in higher-priced markets like California and Alaska.
Down payment gifts and rules
You don’t have to save up all the money on your own. Borrowers who obtain an FHA loan can receive money as a gift to put towards the total amount of the down payment.
If you’re planning to take that route, there are several rules to keep in mind. Gifts can come from friends, family members, labor unions and employers, according to the U.S. Department of Housing and Urban Development (HUD). Even nonprofit organizations can provide money for a contribution toward a down payment.
You can’t get money from anyone you want, though. HUD prohibits these parties from contributing to a down payment:
- Home builders
- Real estate agents or brokers
- Anyone with a vested interest in selling the home
FHA loan down payment assistance
While the FHA doesn’t have a proprietary down payment assistance program, most states offer various down payment assistance programs for both first-time and low-income homebuyers. Borrowers obtaining an FHA loan are typically eligible for these programs.
You can browse first-time homebuyer programs by state on Bankrate.
Additional cost considerations for FHA loans
The down payment may be the biggest chunk of change on your mind when trying to buy a home, but there are plenty of other costs you’ll need to consider as you develop a budget.
Mortgage insurance requirements for FHA loans
One catch to FHA loans is that borrowers are required to pay mortgage insurance premiums, or MIP, when they put less than 20 percent down. This additional payment is the trade-off for the lower down payment; it compensates the lender for taking on more risk (the less cash a borrower invests in a home, the more likely they are to default on a loan, the reasoning goes).
FHA loans come with two mortgage insurance premiums:
- Upfront mortgage insurance premium: 1.75 percent of the loan amount, paid when the borrower gets the loan; the premium can be rolled into the mortgage
- Annual mortgage insurance premium: 0.45 percent to 1.05 percent, depending on the term of the loan (15 years vs. 30 years), the loan amount and the initial loan-to-value ratio, or LTV; the premium is divided by 12 and paid monthly
For a homebuyer who borrows $300,000, this means the upfront MIP would be $5,250 and the annual MIP would range from $1,350 ($112.50 per month) to $3,150 ($262.50 per month).
Unlike private mortgage insurance for a conventional loan, FHA loan borrowers who put down less than 10 percent are required to pay these premiums for the entire term of the mortgage. The only way you can stop paying them is if you refinance into a non-FHA loan or sell the home.
FHA loan closing costs
In addition to your upfront mortgage insurance premium, you’ll also need to figure in a range of additional closing costs on an FHA loan, which can add thousands of dollars to your budget. These costs include appraisal fees, title insurance, recording fees and a range of other line items. Typically, you can expect FHA closing costs to add anywhere from 3 to 6 percent of the purchase price to your bottom line. The best way to keep these costs in check is to compare multiple FHA lenders to see where you’ll find the lowest fees.
Other low-down payment mortgages
Aside from FHA loans, there are other types of mortgages that have either a low or no down payment requirement. These include:
- Fannie Mae and Freddie Mac – Both offer conventional loan programs with just 3 percent down.
- VA loans – These loans for military members, veterans and their families, backed by the U.S. Department of Veterans Affairs, have no down payment requirement.
- USDA loans – The U.S. Department of Agriculture guarantees no-down payment loans for borrowers in eligible areas.
- Native American Direct Loans – Native American Direct Loans (NADL), for eligible Native American veterans and their spouses, also have no down payment requirement in most cases.
Bottom line on FHA down payments
FHA loans make homeownership more widely available to borrowers due to their low down payment and credit score requirements. While that flexibility comes with the price of paying mortgage insurance, that extra cost can be well worth it to stop renting sooner than later. Start comparing rates today to see how much you can afford with an FHA loan, and be sure to keep a close eye on Bankrate’s cost estimates to get a sense of which lender offers a better fit for your finances.
Additional reporting by David McMillin