FHA loans are known for their lower down payment requirements, which is what makes them very attractive for first-time home buyers. This is not the case for every loan, however. The required down payment for FHA loans is not a cut and dry situation; every scenario has its own requirements. The amount of the down payment will come from a collaboration of the lender and the FHA guidelines. It greatly depends on the type of risk that the lender wants to take as well as the amount of money that the FHA will guarantee, which are not always identical amounts. When the entire scenario is laid out, the required down payment can be figured out by everyone involved.
The Basic Down Payment
In general, the FHA requires 3.5 percent of the sales price to be put down on the home; this is the minimum requirement for everyone. This is the case in any state and any zip code. This minimum is a guideline for lenders, however. It could be higher if your circumstances warrant a higher down payment from the lender, such as poor credit, limited assets or other situations that make the loan risky. In addition, if you are selling your home to a relative or to someone that you have a business relationship with currently, a 15 percent down payment is required by the FHA to ensure the soundness of the deal.
Borrowing more than the FHA Guarantees
In some cases, which is typically those borrowers with higher credit and good compensating factors, such as numerous assets, the lender will approve a loan amount that is higher than the FHA will guarantee on a home. In this case, the FHA will guarantee the amount that they approve and the lender risks the remaining loan amount. For example, if the FHA guarantees $200,000 for a home, yet you need $215,000, the lender could approve you for the $215,000 loan amount, knowing that $15,000 of the loan is not guaranteed, should you default on the loan in the future. The compensating factor in this situation is the increased down payment that you will be required to put down in order to obtain the higher loan amount. In any situation, however, the maximum amount of the loan cannot exceed the sales price of the home.
FHA Loans and Poor Credit
Your credit score plays an important role in the amount of the down payment required for your FHA loan. In general, if your credit score is higher than 580, you will only be required to put down 3.5 percent of the sales price, according to the FHA. If your score is between 500 and 580, the down payment requirement is increased to 10 percent. These guidelines are strictly put forth by the FHA and can be increased by the lender that you use. Each lender has its own say in how much they want put down on a loan in order to decrease the risk involved in the loan. Most lenders will increase the amount for any borrower that has a credit score below 640 and might even limit the loans that they fund for those borrowers with a credit score lower than 640.
Down Payment Gifts
In some cases, borrowers do not have the required down payment to put down on a home or they do not want to use up their reserves before purchasing a home. In these cases, a gift can be accepted as long as it follows the FHA guidelines. The largest stipulation on this rule is the need to prove that the money truly is a gift and is not required to be paid back. The gift must come from a relative, employer, charity or government agency. The gift cannot come from the seller, realtor or anyone else with a vested interest in the home.
The down payment for an FHA loan has many circumstances that could change its requirements. In addition, each lender has their own say in what they are willing to accept and/or require for each FHA loan that they close. The entire process depends on the lender, FHA and the borrower to determine the most attractive loan terms for everyone involved in the loan process.Click to See the Latest Mortgage Rates»