January 6, 2014
A reader asks, “I want to buy a house for $399,000.00…how much of a down payment will i have to make? I understand that banks require a 20% down payment. Does the FHA also require 20%?
The minimum cash investment–a down payment on an FHA guaranteed mortgage–is set at 3.5%. However, there are many circumstances where a lender may require a higher down payment. This can include situations where a borrower’s FICO scores or other qualifying information are marginal or outside the usual range for FHA loan approval.
A higher down payment can be considered a “compensating factor”. In cases where compensating factors need to be considered, a larger down payment is acceptable, but only if the down payment meets FHA guidelines. Those guidelines include a minimum 10% down, as described in HUD 4155.1, Chapter Four, Section F under the Compensating Factors section, which states that a bigger down payment can be used in this fashion when, as FHA rules specifically state in Chapter Four, “The borrower makes a large down payment of 10% or higher toward the purchase of the property.”
Other compensating factors include “substantial cash reserves” and certain types of cash available from retirement plans or other types of savings. But when would these compensating factors need to be reviewed? According to HUD 4155.1, one such instances involves a borrower who has a debt-to-income ratio does not fall within FHA guidelines.
Debt-to-income ratios are calculated in two ways for FHA loan purposes. One way involves adding up the borrower’s total monthly financial obligations and comparing it to the borrower’s income. The second way is to consider all that along with the new financial responsibility of the FHA mortgage payment. If the borrower falls within a certain ratio, the FHA loan can be approved. If that ratio is exceeded (see below) compensating factors can help get the loan approved.
According to HUD 4155.1, “The relationship of the mortgage payment to income is considered acceptable if the total mortgage payment does not exceed 31% of the gross effective income. A ratio exceeding 31% may be acceptable only if significant compensating factors, as discussed in HUD 4155.1 4.F.3, are documented and recorded on Form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary.”
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.
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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