December 15, 2011
FHA home loans require a down payment of at least 3.5% of the lower of the appraised value of the home as determined by an FHA appraisal, or the asking price of the property.
Borrowers must pay the 3.5% minimum out of pocket and must document the source of down payment funds. This is required to avoid the temptation some borrowers have of taking out what bankers call a “non-collateralized loan” to make that down payment. A non-collateralized loan can be a payday loan, signature loan or any other line of credit not backed up by real assets.
Approved sources for down payment money on an FHA home loan include the borrower’s savings account, cash saved in private savings clubs or accounts, funds drawn from checking accounts, even IRAs or 401K money can be used.
One area that causes some confusion for first-time FHA home loan applicants is the difference between paying closing costs and making the down payment. Closing costs are considered to be separate expenses and not part of the down payment amount. An FHA loan lender’s fee, appraisal fees, document prep and legal fees are all costs of doing business as a home buyer, but these expenses are not part of what the FHA terms the minimum investment requirement–the down payment amount–for the FHA insured mortgage loan.
While some closing costs may be permitted to be included in the FHA loan financing, the down payment is required as an out-of-pocket expense for several reasons. In some cases the borrower may be required by the lender to make a higher down payment than the minimum 3.5% required by the FHA. This is the lender’s right and is usually required when the borrower isn’t eligible for the most competitive financing terms because of credit rating or other factors.
While a higher down payment means more savings over the lifetime of an FHA insured mortgage, it can be difficult for some borrowers to manage. It’s a very good idea to begin planning–and saving–for such expenses a lot earlier than the recommended one year prep period before committing to a home purchase. Borrowers who do so are in a much better financial position to make smart choices about down payments and related expenses.
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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