July 5, 2016
A reader got in touch with us recently to ask about an important aspect of FHA mortgage loans-the down payment.
“I would be a first time buyer, 3 years full time work history, only car payment bill which is paid on time with auto pay from bank. looking for a single home, I am single with credit score of 797. However I have no down payment…would I qualify for an FHA loan?”
HUD 4000.1 addresses the rules and regulations for FHA home loans and refinance loans. It includes, on page 155, a definition of what the FHA considers a down payment (the “minimum required investment”) and the “Total Required Investment” needed from the borrower. From HUD 4000.1:
“Total Required Investment refers to the amount the Borrower must contribute to the transaction including the Borrowers downpayment and the Borrower-paid transaction costs. The Total Required Investment includes the Minimum Required Investment (MRI).”
And how does the FHA define the MRI?
“Minimum Required Investment (MRI) refers to the Borrowers contribution in cash or its equivalent required by Section 203(b)(9) of the National Housing Act, which represents at least 3.5 percent of the Adjusted Value of the Property.”
The short answer to the reader’s questions is that there is no such thing as a “zero down payment” FHA home loan for new purchases. The borrower is not only required to make a minimum 3.5% down payment (as referenced above) but that payment is required to come from approved sources.
That means that down payment funds cannot come from unsecured loans or credit card cash advances, etc. The lender is required to verify the source of all down payment funds to insure they meet FHA standards.
The reader’s question also implies a common misconception about FHA mortgages; namely that they somehow favor or give preferential treatment to first time home buyers.
An individual participating FHA lender may have programs that offer incentives to first time borrowers, and state or local agencies may also have assistance for new home buyers, but the FHA single family home loan program itself does not. Borrowers interested in state/local first time home buyer programs should check with the agencies in their area to see what may be possible.
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:
http://www.fha.com/fha_loan_limits_widget
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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