Are you eager to join the ranks of homeowners but convinced that cobbling together a suitable down payment is an impossible task? Think again. The Department of Housing and Urban Development‘s FHA loans are designed to help people leap this financial hurdle. However, there are some conditions that would-be borrowers need to be aware of. What do you need to know about FHA down payment requirements?
Understanding FHA Down Payment Requirements
NerdWallet reports that 13 percent of home loans in 2016 were FHA loans. With roughly 80 percent of FHA loans being made to first-time home buyers, that works out to some 730,000 new homeowners. Could one of these loans help you make your dreams of homeownership a reality? Exploring FHA down payment requirements can help you decide if an FHA loan is a good option for you.
Credit Scores Matter
Known for looser credit requirements than many conventional loans, FHA loans can help aspiring homeowners with relatively low credit scores secure the funds that they need to make their dreams come true. At PrimeLending, the minimum FICO credit score needed to qualify for an FHA loan is 580.
While less-than-perfect scores won’t bar you from getting an FHA loan, it’s still a good idea to spend a little time polishing your credit because your credit score influences both the interest rate for your loan and the size of the down payment that you’ll need. Borrowers who want to keep their monthly mortgage payments lower or build equity in their new property more quickly may also wish to make a larger down payment.
Down Payment Gifts
FHA down payment requirements don’t just set the rules for the size of the down payment needed. They also include stipulations for where the funds used for the down payment can come from. As The Mortgage Reports notes, gifts are okay if they meet certain conditions.
For starters, no gifted funds can come from anyone who will benefit from the home purchase, including the seller or real estate agent. However, you can get some or all of your down payment from family, your employer, your church, or other approved organizations if you document these gifts properly. To use the gifted funds, you have to demonstrate that the giver does not expect repayment, that the giver has the funds to give, that the money has been transferred to you, and that the money didn’t come from an unapproved source. To do that, you’ll likely need to document the transfer of funds to your account and get a signed gift letter from the giver. If there’s any question about whether the giver has sufficient funds, you may also be asked to provide a copy of the most recent statement from the giver’s account.
While the rules regarding FHA down payments prevent the seller from contributing to your down payment, there is a way that they can assist a buyer who is struggling to come up with the cash to complete a home purchase. According to the FHA, sellers are allowed to contribute up to 6 percent toward a buyer’s closing costs. If you need to reserve less money for the closing table, you can free up additional funds for the down payment.
Down Payment Loans
If your savings and the gifts that you’ve gathered from family members and other parties are still not quite enough to meet your down payment obligations, there are a few more avenues to explore. As the Home Buying Institute explains, you aren’t allowed to use loans from family or friends to plump up your down payment, but you are able to utilize funds from a collateralized loan. You have to provide evidence that the loan is fully secured with either assets or real property other than the real estate that is being purchased with the FHA loan. In addition, funds secured via housing assistance grants* and loans provided by various federal and state agencies can be used for your down payment.
Now that you understand FHA down payment requirements, are you ready to explore your options for home loans? Contact us today to schedule a consultation. The experienced loan officers at PrimeLending strive to make securing the right mortgage for your unique situation as simple and hassle-free as possible. At our branches located throughout Kansas City, we can help you explore our wide variety of loan products and programs, including government-backed mortgages like FHA and USDA loans. When you’re ready to get started, please give us a call at 844-701-5626.
*Certain restrictions apply. Not available in all areas. Please contact your PrimeLending loan officer for more details.