One of the biggest benefits of an FHA loan is the low down payment it requires. FHA loans require a down payment of just 3.5 percent of the home’s purchase price/appraised value, which would be $7,000 on a $200,000 home.
Though this is the lowest an FHA down payment can go, it is not guaranteed for every borrower. The down payment required by an FHA loan is heavily dependent on the applicant’s unique credit score, the chosen lender and other factors.
Credit score has the biggest influence on the required FHA minimum down payment. With a credit score of 580 or above, most applicants can expect to need a 3.5 percent down payment on the home. Applicants with a credit score below 580 will need to make a down payment of at least 10 percent.
The minimum threshold for the 3.5 percent down payment is a 580 credit score. Each lender evaluates borrowers at their own discretion, and they may require a higher credit score in order to move forward. The FHA does not set credit score requirements for the lenders making these loans. Those minimums can vary by lender and other factors.
The important thing to remember is that while FHA loans are offered nationally and to all eligible Americans, they are highly dependent on the lender the borrower has chosen. Applicants shouldn’t expect the same rates, credit score minimum or other details as a friend or family member, especially if different lenders have been utilized.
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When it comes to paying for your down payment -- whatever the percentage may be -- the FHA has deemed a handful of “acceptable sources” where this money can come from. Naturally, personal savings and checking account funds are eligible, but there are also several other options as well.
The FHA also allows down payment funds to come from donations, grants, gifts, private savings clubs, savings bonds, IRAs, 401(K) accounts, investments, and down payment assistance programs.
Lenders look at the source of down payment funds with much scrutiny, as they want to ensure an applicant isn’t stretching themselves too thin to purchase the property. A lender might ask for documentation of sourcing, as well as information about the nature of the funds -- especially if the payment seems excessive based on their history of savings and balances.
Gift money from parents, grandparents and other loved ones is a popular method for covering FHA loan down payments. The catch here is that, again, you’ll need to document the source of the money. This requires what’s called a “gift letter” -- essentially a note from the donor that makes it clear the funds are 1) a gift to the borrower and 2) do not require repayment. Certain lenders may require further documentation, like bank statements, as well.
Another important item to note: The amount of gift money you can use on an FHA down payment depends on your credit score. If your score is between 580 and 619, at least 3.5 percent of your down payment must come from your own funds. If your credit score is above this threshold, all of your down payment can come from gift money.
Gift letter policies and guidelines can vary by lender. Talk with a trusted FHA lender about their requirements if you’re thinking about using gift funds on an FHA loan.
You might also be able to utilize down payment assistance programs to help cover part or all of the costs of the FHA down payment. Many of these programs are offered by local housing agencies, cities, states and counties, so it’s best to check with your municipality to see what assistance you might be eligible for.
Lenders might have their own policies when it comes to mortgage assistance programs, too. Talk with your loan team about their approach and what might or might not work.