February 2, 2024
Most home buyers will make some form of down payment, with exceptions for those using VA mortgages with no money down for qualifying servicemembers, veterans, and surviving spouses.
There is also no-money-down USDA loans, but these are need-based and have income caps.
By comparison, FHA mortgages, with their low 3.5% down payment requirements, are attractive to many house hunters who want to save more money upfront on the mortgage.
Do You Really Have To Put 20% Down?
Some borrowers may hear stories of borrowers being required to pay 20% down. This would be true in cases where the home buyer wants to avoid mortgage insurance on a conventional mortgage.
And while that is not the only down payment option offered in such cases the mere idea of paying 20% down makes some shy away from owning a home.
As stated above, the FHA mortgage loan program offers new purchase homes for owners/occupiers with down payments as low as 3.5%. FHA credit score ranges for this down payment are from 580 and above, but your lender may have additional requirements.
FHA loan applicants who don’t meet FHA and lender credit score minimum requirements may need to consider a 10% down payment. But even that amount can feel daunting for some. Is there help for these buyers? Yes.
Local Down Payment Grant Programs
Borrowers may not be aware of the local down payment assistance programs offered in their area. It is a very good idea to search for local down payment grants because these programs can be a major help in offsetting your out-of-pocket expenses or upfront costs of the home loan.
Keep in mind that the FHA itself does NOT provide down payment assistance and your seller is not allowed to contribute toward your down payment. But if there is a local down payment grant offered in your area it may be just what you need to help with the upfront cost of your home purchase.
There is also help available from the seller of the home–as mentioned above, the seller can’t help you with the down payment but CAN help you by contributing up to six percent of the closing costs for you. This is known as a “seller concession,” and you will need to discuss this with the seller and then the lender if all parties agree.
FHA Loan Down Payment Help From Friends And Family Members
FHA borrowers can accept a down payment gift from a friend, family member, or employer. However, nobody with a financial stake in the transaction can give you down payment gifts. So if your seller is also your family member, friend, or employer, they will be limited to giving you the six percent seller concession we discussed above.
Down payment money can never come from credit card cash advances, payday loans, or non-collateralized loans of any kind.
Regardless of the source of your down payment grant or gift, the lender is required in FHA rules found in HUD 4000.1 to establish that the money did not come from an unapproved source.
Lender requirements and the laws of your state could both dictate, in part, how to proceed.
Ask first if you aren’t sure. Be advised that you may need a letter from your down payment gift giver certifying the money is a true gift and that there is no expectation of repayment. This is a typical requirement when dealing with down payment grants or gifts.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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