January 18, 2022
Why do people still believe you MUST make a 20% downpayment on a home loan? Like other persistent home loan myths (including the one that holds that FHA mortgages are ONLY for first-time homebuyers), the 20% issue has been passed along to unsuspecting first-time home buyers for decades.
What is the reality?
FHA mortgages require 3.5% down at a minimum. That’s for borrowers who financially qualify with FHA and lender credit score requirements.
FHA loan rules in HUD 4000.1, the FHA Single-Family Lender’s Handbook, says that 580 or better is the FHA standard. You will need to ask the lender you choose whether there are higher FICO score requirements with that financial institution. (There often are.)
With conventional mortgages, 20% down is typically required for borrowers who want to avoid mortgage insurance. A lower-than-20%-downpayment is possible for those who don’t mind the added expense of mortgage insurance.
And with a conventional mortgage, you may be able to cancel your mortgage insurance once your home equity reaches 20%. But for FHA loans, the lower downpayment is not tied to a mortgage insurance requirement–you will either pay mortgage insurance in typical FHA loan cases for either 11 years or the lifetime of the mortgage.
Making a higher down payment for an FHA mortgage can potentially reduce the insurance requirement from “life” to “eleven years”, but you will need to work out with the lender how this choice affects your mortgage loan overall.
A higher downpayment is always a good idea if you can afford to do so. A lower loan principal means less money in interest paid out each month, each year, each decade. It also means you get to the place where you can borrow against the equity in your home faster should you choose to do so.
But even if you put 20% down on an FHA mortgage you don’t get to sidestep the mortgage insurance requirement. And keep in mind that when considering a conventional mortgage, you may be required to put down more upfront than for an FHA loan.
Those who have excellent credit and enough cash reserves to pay 20% down may be better served by a conventional mortgage.
But for the rest of us, the FHA home loan option is a smart one to consider, especially if you need to save more money out of pocket on the transaction.
It’s smart to compare your options between FHA, conventional, and even other loan programs like USDA mortgages–make the most informed decision you can about your mortgage loan options.
Not sure how to get started with an FHA mortgage? You can call the FHA directly at the agency’s toll-free number (1-800 CALL FHA) to request a referral to a local, HUD-approved housing counseling agency near you that can help you get started on the road to a new home loan with advice for planning your loan, budgeting and saving, and more.
When you are ready to apply for the loan you can reach out to the lender of your choice knowing you have a lot of good information to guide you through the process.
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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