March 8, 2013
We get reader questions about FHA loan down payments–many people aren’t sure how much they need to pay up front and how much is required by the FHA loan program. Some borrowers mistakenly assume there’s a “no money down” option for first-time FHA loan applicants, and others assume there is a set dollar amount which must be paid regardless of the transaction.
What’s the reality?
FHA home loans do not feature a no-money-down option. FHA loan rules state that the minimum required down payment is as follows: “For purchase transactions, the maximum LTV is 96.5% percent (the reciprocal of the 3.5% required investment).”
The acronym “LTV” stands for loan-to-value and is, in simple terms, the amount of the loan after the down payment has been made. An LTV of 96.5% basically means that the borrower gets a loan for 96.5% of the total amount of the purchase (rather than 100% because of the 3.5% down payment required and made by the borrower.)
There is also sometimes a bit of confusion over what constitutes a down payment. Do closing costs and other FHA loan expenses count as part of this 3.5% minimum down payment? Not according to the FHA loan rulebook:
“Closing costs (non-recurring closing costs, pre-paid expenses, and discount points) may not be used to help meet the borrower’s minimum required investment.” That means your downpayment is made separately from these other costs and expenses.
There is no specific, set dollar amount for the down payment. Since it is calculated as a percentage of the loan amount, the borrower must work together with the lender to determine the amount of the down payment.
FHA loan applicants should know that while 3.5% is the minimum required down payment, it is not the only amount that may be put down. Borrowers are free to pay more and there is no penalty for early payoff of the FHA mortgage.
You may find a larger down payment to be a financial advantage over the lifetime of the FHA loan. Discuss your goals with the loan officer and ask how a larger down payment can be helpful over a 15-year or 30-year mortgage.
Do you have questions about FHA home loans? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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