June 21, 2013
FHA loan rules include guidance for lenders and borrowers about maximum loan amounts and down payment requirements. There’s a myth about today’s FHA home loans that some still repeat–variations on the idea that there may be no down payment required for first-time home buyers. What’s the reality?
FHA loans do require a down payment. It’s much lower than the required down payment for many conventional loans, which is why some might believe that the FHA down payment requirement is reduced or eliminated for first-time borrowers.
The minimum down payment amount for an FHA new purchase loan is 3.5%. No closing costs can be used to meet this requirement–the down payment is a separate amount from what are called “non-recurring” costs, prepaid expenses, discount points, etc.
The down payment amount is 3.5%–but many borrowers want to know what this amount is a percentage of; is it the sale price of the home? The total loan amount?
According to the FHA loan rules as specified in HUD 4155.1, the minimum down payment is 3.5% of “the lesser of the appraised value or the sales price of the property.” That’s found in Chapter Two, Section A under the heading, “Maximum Mortgage Amount For A Purchase”.
How does the FHA calculate that maximum mortgage amount it will insure?
According to Chapter Two, “The maximum mortgage amount that FHA will insure on a purchase is calculated by multiplying the appropriate loan-to-value (LTV) factor by the lesser of the property’s
• sales price, subject to certain required adjustments, or
• appraised value.
In order for FHA to insure this maximum loan amount, the borrower must make a required investment of at least 3.5% of the lesser of the appraised value or the sales price of the property.”
Do you have questions about FHA loan rules? 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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