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Your Credit Score Affects How Much You Need Down

Borrowers with a 580 credit score can qualify for an FHA loan with just a 3.5% down payment, while borrowers with a 500-579 score need 10% down. Getting approved for an FHA loan with a credit score below 580 is very rare today. You should try to increase your score to 580 before applying.

You can read more about FHA down payment requirements on the HUD website.

What is an FHA Loan?

In 1934 the Federal Housing Administration was created by the Federal Government to encourage homeownership. They do not lend money; the FHA acts like an insurance policy on the loan itself, which reduces the risk for lenders allowing them to lend money to more buyers.

What is a Down Payment?

When you get a mortgage to finance a house, the down payment is a percentage of the purchase price the borrower must come up with. FHA finances up to 96.5% of the purchase price. The remaining 3.5% will come from the borrower in the form of a down payment.

For example, if a buyer agrees to purchase a home for $200,000, the down payment is $7,000. The remaining $193,000 will be financed.

Down Payment Needed by Mortgage Loan Type

While FHA loans have one of the lowest down payments of any home loan, they aren’t the lowest. There are two types of government-backed loans, VA and USDA loans, that can you get with no money down. There are even conventional loans that have a lower down payment.

How the FHA Down Payment affects Mortgage Insurance

The FHA is an insurance policy that reimburses mortgage lenders if the borrower defaults on the loan payments. And every insurance policy has a premium that must be paid.

The FHA MIP rate varies depending on the amount of the down payment used. If you just put the standard 3.5% down payment required for an FHA mortgage, then your mortgage insurance rate will be 0.85%. With a down payment of 5-10% down, your MIP rate will drop to 0.80%. If you have a 10% down payment, your rate is 0.80% and is only required for the first 11 years of the mortgage.

fha mip chart updated for 2017

FHA Down Payment Gifts

One of FHA home loans’ great benefits is that the down payment can be a gift from a friend or family member. Meaning you can essentially close on your home with no money out of pocket. You will need a gift letter from the gifted to provide your mortgage lender.

The Lender will Trace The Down Payment

The main thing you need to know about down payments is that the money must be traceable. You cannot simply give $6,000 in cash to your lender to cover your down payment. The funds must come from your checking, savings, or investment account.

The funds also need to be traceable for at least three months before closing. If you have cash, make sure you deposit it into your bank account several months before you are expected to close.

The same applies to relatives that are gifting you the funds for your down payment. They, too, will have to show three months of bank statements showing that money was in their bank account and not borrowed. If the funds cannot be traced, then you will not be able to close.

FHA Down Payment Assistance Programs

FHA allows homebuyers to use down payment assistance programs. You can view available HUD first-time buyer programs on the HUD website.

Your local Government will also have various first-time homebuyer programs and down payment assistance listed on their website. Check out your local city and the county website for available programs.

Where Your Down Payment Can Come From

Your down payment for an FHA loan must come from a verifiable source. It must come from your savings, 401k, or other investment accounts. 100% of the down payment can be gifted.

You cannot get a personal loan or use a payday loan to come up with your down payment; it must come from your savings or as a gift.


First-Time Homebuyers

FHA home loans are popular among first-time homebuyers because of the low credit and down payment requirements. They’re available in fixed-rate and adjustable-rate mortgage terms. Have a maximum debt-to-income ratio of 43% and a minimum loan-to-value ratio of 96.5%.

The high DTI ratios that can be accepted make FHA loans a good option for low-to-moderate-income borrowers. Mortgage insurance (MIP) is required on all FHA mortgages regardless of the LTV ratio.

Other Expenses To Budget For

Closing costsClosing costs are fees charged by lenders for processing and funding the loan. Typically closing costs range from 2%-5% of the loan amount.

Home Appraisal Fee – Your lender will order a home appraisal to get the property’s current market value. Appraisal fees run between $300 and $800.

Up-front Mortgage Insurance Premium – The pro-rated PMI amount for the year will be added to closing fees.

How much home can you afford, including PMI, property taxes, and insurance calculator

Credit Scores

Your credit score is directly tied to the interest rate you receive on a mortgage loan. If you have a low credit score, you will have a higher monthly mortgage payment rate. You should work on maximizing your credit score before applying for a mortgage.

Ways you can improve your FICO Score.

  • Pay down your credit card balances
  • Get added as an authorized user
  • Call your creditors to remove late payments
  • Settle collection accounts and try getting them to remove them
  • Stay current on your payments and don’t apply for new credit


The Bottom Line

The FHA down payment requirements are quite exact.

If you have a 580 score, you’ll need just a 3.5 percent down payment.

The funds must come from your savings or retirement account, or a friend or family member can gift you the down payment funds.

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