September 18, 2023
Are there no down payment FHA loans?
Some borrowers feel the pinch when trying to save up for closing costs, inspections, and the required minimum investment FHA loan guidelines say are mandatory for most FHA loans. They often wonder if there is a no-downpayment option when applying for an FHA mortgage.
Making a down payment is an important and mandatory part of the FHA loan process, and you won’t be allowed to sidestep this requirement.
That said, there is an exception for FHA 203(h) rehabilitation mortgages, but those are reserved for victims of natural disasters in federally declared disaster areas.
Why do some people mistakenly believe FHA home loans are available for no money down? Partially because they are mistaking FHA loans for the VA home loan program, which offers a zero-down option. But that’s not the only reason.
Some borrowers may have heard that others may have taken advantage of state or local down payment assistance programs, resulting in a reduced down payment expense for the borrower.
These programs are not available via the FHA or HUD, and you will need to find any down payment assistance in your housing market.
Any such assistance must meet FHA standards to include a gift being an actual, bona fide gift with no expectations of repayment. Some other options include closing costs being paid by an “interested party,” but such closing costs cannot include the borrower’s down payment.
No money down loans aren’t possible for an FHA mortgage, but the minimum down payment for an FHA loan (assuming the borrower has the appropriate FICO scores based on FHA minimums AND lender standards) is only 3.5% of the adjusted value of the property.
A borrower should begin planning and saving for the down payment on a new home at least a year in advance; those who struggle to raise funds for the down payment should know that the FHA requires your loan officer to verify the sources for all down payment money.
If your down payment funds come in the form of gift funds, expect your lender to require verification of those funds, too.
Even if you are not making the down payment from your own bank account (or using funds that have been deposited into your account to be used as a down payment gift), the lender must know that non-collateralized loans, payday loans, cash advances on credit cards or other sources have not be used for your down payment.
If you want the lowest possible down payment, you must approach a participating lender to see how the FICO score standards for maximum financing measure up to the FHA loan minimum requirements.
Your lender may have higher FICO score rules and if your credit rating isn’t quite there, spending some extra time to work on your credit might be an important step to consider.
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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