Minimum Down Payment Loan Requirements

by Jane L.Feb. 25, 20173
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FHA Minimum Down Payment Requirements

Many prospective homeowners seek to acquire an FHA loan, which is backed by the Federal Housing Administration - making it a less risky loan for lenders should a homeowner default on the mortgage payments. In return for lower interest rates, as well as a lower minimum down payment requirement, borrowers must pay mortgage insurance as part of the monthly premium. Depending upon the amount of the loan, the mortgage insurance can sometimes be a significant addition to the loan premium.

Still, FHA loans are one of the best options for buyers who haven't been able to save enough for the larger down payment associated with conventional loans or those who can't afford higher premiums due to higher interest rates. But, before you jump into anything, you must understand the rules and requirements for FHA loan down payments, as they aren't the same as conventional loans. To determine if you meet the FHA minimum down payment requirements, consider the following:

How Your Credit Score Affects Your Down Payment Amount

FHA loans work on a two-tiered system in regards to down payments. If your credit score is 580 or higher, you are only required to make a down payment of 3.5 percent. If your credit score is lower than 580, you must make a down payment of 10 percent. This differs from conventional loans in which down payment amounts can vary depending upon the lender but are usually higher anyway.

Acceptable Sources for Down Payments

A lower down payment is attractive to many prospective home buyers, but still, even 3.5 or 10 percent can cost you a significant amount if the home is highly priced. In this current economy, it is not uncommon for people who make a good salary to not have enough savings to come up with the down payment on a new home.

Thankfully, with an FHA loan, you are allowed to use funds from other sources towards your down payment, such as checking accounts, savings accounts or CDs. You can also use funds from business, equity and sales of assets. Generally speaking, as long as you receive the cash from somewhere, it is acceptable to use as a down payment for an FHA loan.

Regarding Gifts for Down Payments

It is also not uncommon for home buyers to receive funds from parents or other people as a gift to be used towards the down payment. If you are going to be receiving funds in this way, you will need to let your lender know, as your parents (or whoever is providing the gift) must write a notice stating so, ensuring that there is a record for the lender. It is a minor formality, and it typically does not affect the status of the loan.

Down Payment Programs

If you aren't going to be able to gather enough funds for a down payment, either through gifts or other means, you can always turn to down payment assistance programs. Each state has its own programs for prospective home buyers, so take the time to research what options are available in your state. You can also ask your lender or financial institution for advice on where to turn for down payment assistance; many lenders work with other organizations that can provide you with the help you need.

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