Lower Down Payment with FHA Loan & Total Lifetime Cost

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Some financial experts will tell you to always put 20% down on a home purchase. Others may say it’s perfectly normal to put down less. 

For those who want to avoid making a big down payment, an FHA loan is one of the most popular ways to buy a house. Since they’re backed by the Federal Housing Administration (part of the U.S. Department of Housing and Urban Development, or HUD), FHA loans can offer better rates and lower down payments for qualified applicants. The FHA is essentially taking on the risk of default from the lender. This opens the door to more loan applicants who otherwise would not be able to take out a loan.

However, just because mortgage rates are low and you may get a break on required down payment doesn’t change the fact that you will have a monthly mortgage payment, plus a mortgage insurance premium (MIP), for 15-30 years. Not to mention all the costs that come with homeownership, like property taxes, homeowners insurance, maintenance, and home association fees. That’s why you should never buy into a home you cannot afford.

With that in mind, for those who may not qualify for a conventional mortgage and want to purchase a home with a low down payment, an FHA loan may be an option to explore. 

How Credit Score Impacts Your FHA Loan Down Payment

What makes FHA loans so attractive to prospective buyers is how the requirements compare to a conventional mortgage

“FHA loans are tailored towards home buyers with lower income and lower credit,” says Jon Lallande, a loan officer with Cross Country Mortgage in San Juan Capistrano, Calif. 

It’s important to keep in mind that the 3.5% down payment isn’t available to everyone. When using an FHA loan, your down payment will be determined by your credit score.

Borrowers who have low credit scores appear risky in the eyes of lenders and may be required to put down more than those with higher scores. You can put down 3.5% of your home’s purchase price as long as you have a credit score of 580 or higher. Less than that (down to a minimum credit score of 500), and you’ll have to put 10% down, says Lallande.

Besides the higher down payment requirements, borrowers with scores below 580 may have a harder time finding lenders willing to offer FHA loans.

“Almost every lender I’m aware of right now is not [approving loans] below 580 credit scores,” says Breon Price, a loan officer with Motto Mortgage. “Most lenders are requiring higher scores and stipulating 3.5% down payments.”

Homeowners who are interested in getting an FHA loan but don’t have a 580 credit score might want to consider waiting until their score goes up or speaking to a HUD-approved housing counselor in their area for more specific advice. 

FHA Loan Down Payment Gifts and Rules

Homeowners can receive cash from loved ones to go towards their down payment amount, but the HUD has put in a few stipulations. Anyone can provide up to 100% of the down payment amount, but there cannot be any expectation that the borrower will repay the funds. This includes the borrower’s family members, close friends, employer, as well as charities that help first-time homebuyers.

Pro Tip

Homeowners can look into state and local down payment assistance programs to see if they meet eligibility requirements towards down payment grants.

“The way the rule reads is that this person [or entity] has the borrower’s best interest at heart,” says Price. “Lenders require a letter explaining how long you’ve known that person,” continues Price. 

“[Lenders] need to validate where the funds came from,” Price says. You may be asked to provide documentation such as a copy of a certified check or bank statement along with the letter.

Other Low Down Payment Loans

There are other low, or even zero, down payment options other than FHA. 

  • HomeReady: This first-time homebuyer program from Fannie Mae offers conventional mortgages with down payment amounts as low as 3%. Borrowers will need to meet income limits, have a 620 credit score, and take a homebuyer education course for first-time homebuyers.
  • Home Possible: This program from Freddie Mac also offers mortgages as low as 3% down. Borrowers may qualify with no or low credit scores but will need to meet income limits (usually up to an area’s median income).
  • VA loans – Offered by private lenders and backed by the Veteran’s Association, these types of mortgages don’t have down payment requirements (you can put as little as 0% down) as long as the borrower meets eligibility requirements. 
  • USDA loans – Low-income borrowers in eligible rural areas can take out a loan for as little as 0% down, depending on their assets. 

Prospective homeowners can also look into down payment assistance programs and grants on a local level. 

Choosing The Right Option 

FHA loans can be a great choice for those who can afford a monthly mortgage payment but can’t meet the eligibility requirements for a conventional loan. 

However, there are downsides that will add extra costs to your budget. You’re required to have mortgage insurance during the full term of the loan,  says Chris Hogan, a personal finance expert at Ramsey Solutions, the financial counseling and education company founded by author Dave Ramsey. Because of that, FHA loans are “more expensive than conventional loans,” says Hogan. 

As far as down payment assistance programs, you want to look at the overall costs because it can affect the interest rate on your mortgage, warns Price. “Some programs charge additional closing costs, or your rate will go up,” he says. “For example, if you get 5% down for a down payment assistance program, you’ll have to pay 4.25% interest rate for your mortgage instead of 3.5% if you came up with the cash yourself.” 

So yes, you may be able to get your down payment as low as 3.5% with an FHA loan, but that doesn’t mean you should.  

If you’re not buying a home 100% outright, Hogan still recommends a 20% down payment to avoid mortgage insurance. At a minimum, no less than 10% plus closing costs, said Hogan. If not, you could end up paying more in the long run.

Whichever funding option you choose, make sure you work with a knowledgeable lender, read the fine print, and do some careful calculations, so you’ll know what you’ll be paying in the long run.