FHA down payment requirements: Homeownership without a big savings account

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FHA loans were created to encourage and help first-time homebuyers, since the down payment for these mortgages backed by the Federal Housing Administration can be as low as 3.5 percent.

What is the minimum FHA loan down payment?

The minimum FHA loan down payment is either 3.5 percent or 10 percent, 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 $125,000 home purchase, depending on your credit score, that’s $4,375 down at the low end and $12,500 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 are lower, as are minimum credit scores, helping borrowers buy a home sooner. While the mortgages are insured by the federal government, the loans are obtained through mortgage lenders who are approved by the FHA.

“They tend to have interest rates that are competitive with loans that are out of reach for some borrowers,” Boies says.

What are 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 required because lenders are taking on more risk since the borrower made a lower down payment, which could impact the lender if the borrower failed to make payments on the loan and defaulted.

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 $150,000, this means the upfront MIP would be $2,625 and the annual MIP would range from $675 ($56.25 per month) to $1,575 ($131.25 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] loans are designed for low- to moderate-income borrowers and come with unique concessions and perks,” explains Chris de la Motte, co-founder and president of Simplist, a New York-based digital mortgage marketplace. “This type of loan carries…strict requirements such as required mortgage insurance premiums and loan limits not found in other alternatives.”

“The drawbacks of an FHA loan include that mortgage insurance is required for the length of the loan and there are minimum property standards that you must adhere to,” says Amy Wilemon, a mortgage loan originator at Atlanta-based Silverton Mortgage. “For instance, the home has to be your primary residence and cannot be in need of major repairs.”

Down payment gifts and rules for FHA loans

Borrowers who obtain an FHA loan can receive money as a gift to put towards the total amount of the down payment.

There are several rules that borrowers need 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.

HUD prohibits these parties from contributing to a down payment:

  • Home builders
  • Sellers
  • 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, each state offers 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.

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 3 percent loans – 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.

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