If you can’t come up with a large down payment for a home, you may consider an FHA loan. Because you can qualify for a loan with just 3.5% down, it may be easier to buy the home of your dreams. The FHA makes it easier for first-time homebuyers as well as repeat buyers to buy a home.
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Below we help you understand the down payment rules and how they apply to you.
THE STANDARD DOWN PAYMENT
The standard down payment requirement is 3.5%. A little-known fact, though, is that this only applies to borrowers that have at least a 580 credit score. Many people don’t realize that the FHA allows credit scores as low as 500 in some cases. If you fall into that category, you’ll need to make a larger down payment, which we’ll discuss below.
The good news is if you have at least a 580 credit score, that you can receive 100% of your down payment as a gift. If a relative, employer, or charity wants to provide you with the down payment, they can and no money has to be your own.
THE 10% DOWN PAYMENT
If you have a credit score lower than 580, the FHA requires that you put 10% down on the home. You may be able to secure some of those funds as a gift, but you may also have to put some of your own funds into it.
In fact, it may be hard to find a lender willing to fund an FHA loan with a credit score lower than 580. The FHA allows it, but they don’t fund the loans. The FHA also doesn’t underwrite the loans. The lender takes the risk, even though the FHA guarantees a portion of the loan. The lender still wants to do what they can to avoid the risk of foreclosure.
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WHAT IF YOU MAKE A LARGER DOWN PAYMENT?
Now just because the FHA requires a minimum down payment of 3.5% – 10% doesn’t mean that’s all that you can put down on it. You are more than welcome to make as large of a down payment as you qualify to make.
Many people make just the minimum down payment because it’s all that they can afford. That’s why they agree to take the FHA loan and pay the FHA mortgage insurance premiums. If you only make the minimum down payment, you’ll pay 0.85% of your outstanding loan amount in mortgage insurance. The lender will divide the amount among the 12 payments each year to help make the insurance more affordable.
If you were to make a higher down payment, though, your portion of the mortgage insurance premium will decrease. Granted, it only decreases a small amount, as you’d pay 0.80% rather than 0.85%, but it still saves you a little money each month. Because you pay FHA mortgage insurance for the life of the loan, even just $10 savings a month equals a savings of $3,600 over the life of the loan.
The more money you put down on a home, the less risk the lender takes. In exchange, the lender may be able to give you a lower interest rate. If you combine the savings on the mortgage insurance premium with the savings a lower interest rate can provide, you stand to save a significant amount of money on your mortgage payments. If you need an FHA loan because your credit score or debt ratio won’t let you qualify for a conventional loan, making the larger down payment can help you get ahead.