How Much Down Payment Do You Need for an FHA Loan?

FHA loans offer a pathway to homeownership for many individuals. These government-backed mortgages are designed to make purchasing a home more accessible, particularly for those who may not qualify for conventional loans due to lower credit scores or limited savings. Understanding the upfront financial commitment for an FHA loan is a crucial step in preparing for a home purchase.

Required Minimum Down Payment

The primary financial consideration for an FHA loan is the minimum down payment. The Federal Housing Administration sets specific requirements based on a borrower’s creditworthiness. For applicants with a credit score of 580 or higher, the minimum required down payment is 3.5% of the home’s purchase price.

This lower percentage makes homeownership attainable for many, as it reduces the initial cash outlay compared to conventional loans. If an applicant’s credit score falls between 500 and 579, the FHA generally requires a larger down payment. In these instances, the minimum down payment increases to 10% of the property’s purchase price.

These figures represent the lowest possible down payment amounts mandated by FHA guidelines. While meeting these minimums is sufficient, borrowers can contribute more than the minimum percentage. Contributing a higher down payment can lead to a lower loan amount and reduced monthly payments.

Calculating the down payment involves applying the relevant percentage to the agreed-upon sale price of the home. For example, on a $250,000 home, a 3.5% down payment would be $8,750, while a 10% down payment would amount to $25,000.

Additional Upfront Costs

Beyond the initial down payment, FHA borrowers must also account for other costs due at closing. These expenses are distinct from the down payment and contribute to the total cash required. A significant FHA-specific cost is the Upfront Mortgage Insurance Premium (UFMIP).

The UFMIP is a one-time fee calculated as 1.75% of the base loan amount. This premium can be paid in cash at closing or financed into the total loan amount, increasing the principal balance. This insurance protects the lender if a borrower defaults on the loan.

General closing costs are another category of expenses due when the transaction is finalized. These can include various fees such as loan origination fees, which cover the lender’s administrative costs, and appraisal fees, which determine the home’s value. Other common costs are title insurance, attorney fees for legal services, and recording fees charged by local government to register the new deed.

Prepaid items also fall under closing costs, encompassing expenses like property taxes and homeowner’s insurance premiums that are typically collected at closing to cover a future period. These various closing costs can range from 2% to 6% of the home’s purchase price or total loan amount, although this percentage can fluctuate based on the specific lender, property location, and services required.

Acceptable Sources of Funds

The Federal Housing Administration has specific guidelines regarding the origin of funds used for down payments and closing costs. Personal savings are a common source, with funds drawn directly from a borrower’s checking or savings accounts.

Another widely accepted source is gift funds, which can be provided by family members, close friends, or certain charitable organizations. If utilizing gift funds, specific documentation is required, typically a gift letter from the donor confirming the funds are a true gift with no expectation of repayment. It is crucial that the donor is not an interested party in the transaction, such as the seller or real estate agent.

Down payment assistance programs offer another valuable resource for FHA borrowers. These programs, often administered by state, local, or non-profit entities, can provide grants or second mortgages specifically for down payment and closing cost assistance. Employer assistance programs, where an employer provides funds to an employee for home purchase, are also generally permissible.

Proceeds from the sale of assets, such as another property or investments, are also considered acceptable sources of funds. Conversely, the FHA generally prohibits funds originating from unsecured loans, like personal loans or credit card advances, as these create additional debt that could impair the borrower’s ability to repay the mortgage.