FHA Loan Down Payment: The Complete Guide

How much is the minimum FHA loan down payment?

With an FHA loan, nearly all borrowers will be able to pay as little as 3.5% of the home’s purchase price as a down payment.

But, as with all mortgages, you’ll likely get a lower mortgage rate if you can manage to scrape together more — perhaps 5%.

However, a larger down payment is often not a priority for FHA homebuyers. Frequently, they’re anxious to buy a home as quickly as possible so they can be on the right side of rising home prices.

Minimum FHA Down Payment By Credit Score

Who are the exceptions to the 3.5%-minimum rule? Homebuyers who are already borderline applicants because of their existing debts or very low credit scores. They might be able to persuade lenders to approve their applications by putting down 5% or 10%.

In practical terms, this means the standard credit score requirement for a minimum FHA loan down payment is 580. If yours is that or higher, you can almost always put down 3.5%.

But if yours is 500-579, you might still get approved — if you come up with a 10% down payment.

How does the FHA loan down payment compare with other low down payment programs?

There are other programs that require no down payment at all but they have very specific eligibility requirements.

Conventional 97: 3% down

For most borrowers, the main competitors for FHA loans are ones that conform to Fannie Mae and Freddie Mac’s requirements. These are sometimes known as “Conventional 97” mortgages because you can borrow up to 97% of the value of the home.

This means a down payment of just 3%, which is lower than the FHA’s 3.5% minimum. So why does anyone opt for an FHA loan?

Well, that’s mostly because of the credit score requirements. Fannie, for instance, insists on a minimum score of 620 for its fixed-rate mortgages (FRMs) and 640 for its adjustable-rate mortgages (ARMs) to qualify for the Conventional 97 program. Some lender require even higher scores.

And, to get the best rates for a Conventional 97, you should have a credit score above 700.

If you have a decent credit score, you might opt for a low-down-payment loan from Fannie or Freddie. This is because you can cancel mortgage insurance when you’ve paid down the loan. FHA requires lifetime mortgage insurance.

VA loans: Zero down

VA loans are reserved almost exclusively for veterans who meet minimum service levels, and those now serving in the military.

If you’re eligible, your service buys you one of the best mortgages around: zero down payment, low-interest rate, no continuing mortgage insurance, and the option of a streamlined refinancing later.

USDA loans: Zero down

If you want to live in a less densely populated area, you may be eligible for a USDA loan with zero down.

And that’s more likely than you may think: roughly 97% of the American landmass is so designated, including some suburbs.

However, these mortgages are reserved for those with “regular” incomes — up to 115% of the area’s median to be exact. For example, home buyers near Portland, Oregon can make up to $105,950 and still be eligible.. There’s a good chance that you’re income-eligible.

You still have to pay some mortgage insurance on a USDA loan, but probably less than you would with an FHA one.

How do FHA loans work?

While FHA loans are originated by a private lender, they are “guaranteed” by the Federal Housing Administration (FHA). This means the lender can lend to borrowers who otherwise wouldn’t qualify for a mortgage with very little risk to themselves.

Minimum rules

In order to get the “guarantee,” lenders can help only those borrowers who meet certain minimum standards set by the departments that provide the guarantee. But these private lenders are free to impose their own rules over and above those minimums.

So an individual lender may insist that a borrower has a 600 or 620 credit score, even though the FHA says 580 is the minimum.

If that happens to you, widen your search until you find a mortgage company with lower thresholds. Some are happy to go with 580 in most cases.

Down Payment Assistance Programs (DAPs) and Gifts

Rules for FHA loans are easier than most when it comes to the source(s) of your down payment. So you may be able to accept the whole amount from a down payment assistance program or as a gift.

Still, it’s important to remember lenders may impose stricter standards than the FHA minimums outlined here. So that last bit of advice stands: shop around for a more sympathetic lender if yours has strict rules over down payment assistance and gifts.

Down payment assistance

There are thousands of down payment assistance programs (DAPs) across the United States. And there’s at least one in every state. Many cities and counties offer their own programs, too.

Every DAP has its own rules. Some give help with closing costs while others don’t. Some help only first-time buyers.

Assuming you qualify, you may be offered a low-interest loan that you pay down in parallel with your main mortgage. You could even be given thousands of dollars in outright grants — meaning you never have to repay a cent. In between are various other forms of assistance, including interest-free loans, without payments, that are forgiven in stages the longer you reside in the home, until you owe nothing.

For more information on down payment programs available in your state, visit this list this guide to down payment assistance programs in every state for 2020.

Gifts from family and friends

The FHA is relaxed about some — or even all — of your down payment coming as gifts. But there are three main rules about this:

1. It must be a gift, not a loan in disguise.
2. The person who gives the money must write a formal gift letter for each gift.
3. You must provide a paper trail showing the money leaving your benefactor’s account and arriving in yours.

If your lender has any suspicions that the gift is not legitimate in any way, expect further investigations.

Who is the FHA loan program intended to help?

For many years, successive governments of both parties have seen homeownership as a public good so they have been willing to spend taxpayers’ dollars trying to boost the number of American homeowners. Hence, these government-backed programs, including that for FHA loans.

You can see from the chart below that the homeownership rate varies considerably and appears particularly susceptible to recessions.

_{U.S. Census Bureau, Homeownership Rate for the United States [RHORUSQ156N], retrieved from FRED, Federal Reserve Bank of St. Louis}

So FHA loans may or may not be contributing much to the overall homeownership rate. But it certainly helps:

1. Those who wish to be homeowners but who would otherwise be excluded from mortgage borrowing
2. People with low credit scores
3. Those with limited savings, especially if they can access down payment assistance or gifts

If you’re in one or more of those groups, there’s more that you need to know.

What are the benefits of an FHA loan?

FHA loans have a number of benefits to borrowers, including:

1. Low down payment. 3.5% of the purchase price for most. That’s just $7,000 for a $200,000 home.

2. Low mortgage rate. According to Ellie Mae’s Monthly Origination Overview for closed loans, the average rate for an FHA loan is generally the same or a little lower than that for a conventional loan.

3. Flexible credit qualifications. A score of 580 can work with 3.5% down, or 500 with 10% down. If you don’t have a credit score, lenders are allowed to look at your on-time payment record for other things, such as rent, car insurance, and utility bills.

4. Streamline refinance. If you later want to refinance to a lower rate or monthly payment, there’s a low-cost, low-hassle streamlined refinancing process open to you. But you’ll need a full refinance if you want to take cash out.

And there are a couple of other benefits that are less applicable in current conditions but might prove valuable later:

1. In a buyer’s market, you may be able to persuade your seller to pay up to 6% of the loan amount to help with your closing costs. But that’s tough to swing in a seller’s market, even though it’s fine with the FHA.
2. When you come to sell, if rates are then rising, FHA loans are “assumable.” So a buyer can take on your existing mortgage rather than get her own at the new higher rate. But at the time or writing rates are falling. And this likely won’t be a benefit for years to come.

So FHA loans come laden with valuable benefits but there are some downsides, too.

FHA Program Guidelines in 2020

What else is required to qualify for the FHA program?

Loan limits

In most of the US, you can borrow up to $331,760 for a single-family residence with an FHA loan. But that rises to $765,600 if you’re buying in an area with high home prices.

The limit may be even higher if you want to purchase a home in Alaska, Hawaii, the US Virgin Islands or Guam — or if you’re buying a residence for multiple families.

To find the loan limits in the place you want to buy, use the look-up tool on the website of the US Department of Housing and Urban Development (HUD).

Debt-to-income ratio (DTI)

Alongside your credit score and down payment, the other thing lenders look at closely is your debt-to-income ratio or DTI. That’s the percentage of your pre-tax monthly income that’s taken up by monthly commitments including debt, alimony, and child support. You will also need to add your housing expenses once your new mortgage is in place. Utilities are not taken into account.

FHA guidelines are relatively flexible about your DTI. And it’s possible to get approved with one as high as 50%. However, you’ll likely need to impress in other ways (like a higher credit score or down payment than the minimums) to get that high a ratio approved.

Still, that Ellie Mae report from October 2020 said the actual average DTI for FHA purchase loans closed that month was 42%. That’s noticeably higher than the averages for other types of mortgages in the survey.

How does FHA mortgage insurance work?

The biggest downside to an FHA loan is mortgage insurance.

As well as their guarantees from the FHA, lenders also need to charge mortgage insurance premiums (MIP, sometimes called PMI) to justify lending to higher-risk borrowers. The borrower pays for this insurance, but it’s the lender who gets the money in case of mortgage default.

MIP comes in two parts. First, there’s an initial premium payable on closing. The cost is usually 1.75% of the loan amount. So this is what a $200,000 home purchase would look like:

• Purchase price: $200,000
• Down payment (3.5%): $7,000
• Loan amount before upfront MIP: $193,000
• Upfront MIP of 1.75%: $3,378
• Total loan amount: $196,378

Secondly, you have to pay a smaller (but still significant) premium each month. Most often, this is equal to 0.85% of the existing loan balance per year. For that $200,000 home purchase, it will cost about $136 per month, which is added to the mortgage payment.

But monthly MIP on FHA loans tends to be more burdensome than with other types of mortgages. This is because if your down payment is less than 10%, you’ll be on the hook for these monthly premiums until you pay off your loan, perhaps 30 years later.

With conventional mortgages, you can stop paying once you have 22% equity in your home.

Of course, you’re not trapped with an FHA loan. You can refinance out of FHA once your mortgage balance falls below 80% of the home’s newmarket value.

So does MIP make FHA loans undesirable?

For most borrowers of FHA loans, mortgage insurance is a pain worth enduring. If home prices are shooting up where you want to buy and you can’t get another sort of mortgage, then putting up with MIP until you can refinance is likely worthwhile. This is because, in many markets, you stand to make way more by being a homeowner than mortgage insurance costs you.