✏️ Editor’s Note: Realtor Associations, agents, and MLS’ have started implementing changes related to the NAR’s $418 million settlement. While home-sellers will likely save thousands in commission, compliance and litigation risks have significantly increased for sellers throughout the nation. Learn how NAR’s settlement affects home buyers.
FHA loans require just 3.5% down, which translates to $15,488 on a $442,525 home. Whereas, you’ve to pay $88,505 as per the 20% down payment requirement with a traditional loan.
It’s no surprise that FHA loans have become popular owing to their lenient credit scores and eligibility criteria. Coupled with this, 1 in 6 (15.5%) homebuyers opted for an FHA loan in 2024, up by 14.9% Y-O-Y.
However, despite the low down payment requirement, there are other requirements you should get qualified for. It’s essential to determine your eligibility and loan amount. Know how much loan you can qualify for with a preapproval.
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What Is an FHA Loan?
The FHA mortgage is backed by the Federal Housing Administration. FHA loans have lower down payment requirements, as compared to traditional loans. That makes it a common choice among first-time home buyers.
These loans are designed to help buyers who have low to moderate income and find it difficult to afford higher down payments.
What Are the FHA Loan Down Payment Requirements?
The minimum down payment for FHA loan is 3.5% with a credit score of 580. However, if your credit score is below 500-579, you’ve to put 10% down.
For example, if you buy a house worth $300,000, you’ve to put down $10,500. However, with a credit score ranging between 500-579, your down payment will be $30,000.
What Are the Rules for FHA Gifts Funds?
FHA gift funds can be used only for the primary residences and not for investment properties, cash reserves and closing costs. You can use the gift fund for your FHA loan down payment only when you receive it from your family, friends or relatives.
You cannot accept gift funds from real estate agents, sellers and home builders. Also, if you decide to use your gift funds, you must provide a gift letter to your lender.
Is Down Payment Assistance Available on an FHA Loan?
A down payment assistance program (DPA) is designed for home buyers with limited funds who can’t afford to purchase a house.
The program provides funds to cover some or all of your down payment requirements. Government agencies and non-profit organizations offer these programs.
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How to Qualify for an FHA Loan?
Here are some of the factors you must consider to be eligible for an FHA loan:
- Credit Score: You require a minimum credit score of 580. A good credit score between the range of 580-620 can help you secure mortgage with a interest rate below 7%.
- Down Payment: You require a minimum down payment of 3.5%. However, you can also put 20% down to secure an FHA mortgage.
- Employment History: Your lender may check your work experience of 2 years.
- Debt-To-Income-Ratio (DTI): Your DTI should not exceed more than 43%.
- Property Requirements: The home must be your primary residence. It should meet the requirements set by FHA.
Are there Additional Costs on FHA Loans?
Yes, you have to pay additional costs apart from the down payment for FHA loans:
- Closing Costs: You have to pay 3% to 6% closing costs on an FHA loan, which includes lender fees, third-party fees, and prepaid expenses.
- Mortgage Insurance
How Can You Save for an FHA Loan Down Payment?
You can opt for these ways to save for a down payment:
- Reduce Expenses: Plan your monthly expenses and eliminate unnecessary ones. Be a little strict on your spending to lower your monthly expenses.
- Save Windfalls: Unexpected windfalls like gifts, bonuses, or tax refunds can be useful for you. Therefore, you must save them and put them into your down payment savings account.
- Set Goals: Make a clear goal and determine the monthly amount required to save for the FHA down payment.
Stay consistent throughout the process. Ensure your payments and goals are on track. You must adjust your expenses to fulfill your down payment requirements.
What Are the Pros and Cons of FHA Loans?
Here are the pros and cons of FHA loans:
Pros
- Lower Credit Score Requirements: You require a credit score of just 580 for an FHA loan, that is lower than a traditional loan.
- Lenient Debt-To-Income Ratio: FHA loans accept higher debt-to-income ratios. It allows you to qualify for a mortgage even with an existing debt.
- Refinance Options: FHA offers streamlined refinancing options that can reduce interest rates and monthly payments.
Cons
- Loan Limits: You cannot exceed the FHA loan limits of $498,257 to $1,149,825 for low-cost to high-cost areas.
- Additional Paperwork and Requirements: The FHA loan approval process can be longer than that for conventional loans. The additional paperwork and stricter property standards can slow down the process. You must also fill out FHA loan application and FHA Amendatory Clause.
- Strict Property Standards: Homes purchased with FHA loans must meet certain standards. This includes safety, security, and durability requirements. And so, you can’t purchase homes that need repairs.
Bottom Line
An FHA loan requires a low down payment of 3.5% with a minimum credit score of 580. With a low credit score between 500-579, you’ve to put 10% down. An FHA loan is a popular choice for first time homebuyers due to its lenient eligibility criteria.
However, the property must meet certain standards set by HUD. This makes FHA loans unsuitable for purchasing vacation homes or investment properties as they may require repairs and fixtures.
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Can you get an FHA with 20% down?
Yes, you can put down 20% on your FHA mortgage. This will also help you reduce mortgage insurance premiums .
Can you put zero down on an FHA loan?
No, you cannot put zero down on an FHA loan. However, if you qualify for FHA down payment assistance program, it can help cover your down payment requirements. But with USDA and VA loans you don't require to put a down payment.
What is FHA loan down payment assistance?
Down payment assistance is a program for first-time FHA loan borrowers. Various nonprofit organizations and government agencies pay off or assist with their down payment.
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