Can I Put 20% Down on an FHA Loan?

FHA loans help aspiring homeowners, particularly those who may face challenges qualifying for conventional mortgages. These government-backed loans broaden access to homeownership, offering flexible criteria for borrowers, especially regarding credit history and down payment amount. This flexibility makes FHA loans a viable path for many.

FHA Loan Fundamentals

An FHA loan is a mortgage insured by the Federal Housing Administration, an agency within the U.S. Department of Housing and Urban Development (HUD). This insurance protects lenders against potential losses if a borrower defaults, allowing them to offer more accessible terms. The primary purpose of FHA loans is to assist borrowers who might not meet the stricter requirements of conventional loans, often due to lower credit scores or limited funds for a down payment.

FHA loans feature specific minimum down payment requirements that vary based on the borrower’s credit score. A borrower with a credit score of 580 or higher can qualify for a down payment as low as 3.5% of the home’s purchase price. If a borrower’s credit score falls between 500 and 579, a higher minimum down payment of 10% is required.

Implications of a 20% Down Payment for FHA Loans

Borrowers can make a 20% or higher down payment on an FHA loan. While a larger down payment reduces the loan amount and monthly mortgage payment, it does not eliminate the requirement for Mortgage Insurance Premium (MIP) on FHA loans. This differs from conventional loans, where a 20% down payment generally allows borrowers to avoid private mortgage insurance.

FHA loans require two types of mortgage insurance: an Upfront Mortgage Insurance Premium (UFMIP) and an Annual Mortgage Insurance Premium. The UFMIP is a one-time fee, currently 1.75% of the loan amount, typically paid at closing but can also be financed into the loan. The Annual MIP, usually around 0.55% of the loan amount, is paid monthly as part of the mortgage payment.

The duration for which Annual MIP is paid depends on the loan-to-value (LTV) ratio at origination. If the LTV is 90% or less (meaning the borrower made a down payment of 10% or more), the Annual MIP is required for 11 years. If the LTV is greater than 90% (which means a down payment of less than 10%), the Annual MIP must be paid for the entire life of the loan. Therefore, even with a 20% down payment, FHA mortgage insurance remains a mandatory component of the loan.

Additional FHA Loan Criteria

Beyond the down payment, FHA loans include several other eligibility requirements. Lenders may have their own credit score overlays, which could be higher than the FHA’s minimums.

Debt-to-Income (DTI) ratio is another factor, comparing a borrower’s total monthly debt payments to their gross monthly income. FHA guidelines are often more flexible than conventional loans, typically allowing a housing-related DTI of up to 31% and a total DTI of up to 43%. With strong compensating factors, such as significant cash reserves or a higher credit score, these ratios can sometimes be extended.

The property itself must meet specific FHA minimum property standards. An FHA appraisal evaluates the home to confirm it meets these requirements, looking for functional major systems like heating and plumbing, and addressing issues such as peeling paint or structural defects. FHA loans are subject to specific loan limits, which vary by county and are determined annually to reflect local housing costs.