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Paying The Up Front Costs Of Your FHA Loan


The FHA loan program is designed to help borrowers get into an affordable home.

However, those new to the FHA loan program might not realize there are up front expenses which must be budgeted for; unlike the VA loan program administered by the Department of Veterans Affairs, the FHA loan program does not feature a “no down payment” option.

FHA home loans have a required down payment the FHA regulations describe as a “minimum investment”. FHA loan rules as found in HUD 4155.1 describe the up-front costs of an FHA loan (including the down payment) as follows:

“Under most FHA programs, the borrower is required to make a minimum downpayment into the transaction of at least 3.5% of the lesser of the appraised value of the property or the sales price. Additionally, the borrower must have sufficient funds to cover borrower-paid closing costs and fees at the time of settlement.

Funds used to cover the required minimum downpayment, as well as closing costs and fees, must come from acceptable sources and must be verified and properly documented.”

Note the wording of that last sentence. The money paid for these costs must be verified and documented. There are guidelines as to the acceptable sources of this money (borrower savings or other assets, some contributions by the seller where permitted, and other sources described below) an unacceptable sources (unsecured loans, or credit card cash advances).

What does the FHA loan rulebook say about the acceptable sources of FHA down payment and up front expense funds? Here is a partial list:

Earnest money deposit
Savings and checking accounts
Cash saved at home
Cash accumulated with private savings club
Savings bonds
401(k) and Keogh accounts
Stocks and Bonds
Thrift Savings Plans

This is not a complete list–ask your loan officer for more information on acceptable sources. Unacceptable sources include grants or loans to the borrower by anyone with a financial interest in the transaction. According to the FHA, “The seller, real estate agent or broker, lender, or other interested party may not provide such funds. Unacceptable borrowed funds include

unsecured signature loans
cash advances on credit cards
borrowing against household goods and furniture
other similar unsecured financing.”

For more information on accepted and unaccepted sources of down payment funds and other up front costs, talk to a loan officer.

Do you have questions about FHA home loans? Ask us in the comments section.

13 Responses to Paying The Up Front Costs Of Your FHA Loan

  1. Eric says:

    Why the need for so much money up front (down payment)? It seems most people do not have 10’s of thousands of dollars in savings nor is the economy well enough to allow for such savings. It’s the biggest obstacle, for myself anyways, of owning my own home. I just don’t understand why you need lots of money to borrow money. Seems backwards!

  2. carlos reynoso says:

    I had a foreclosure in April of 2011 on an investment property that I owned. Will I have to wait 3 years to apply for an FHA loan as I noted in the FHA Credit Guidelines? Someone had told me I only had to wait 2 years. I wanted to buy a personal residence to be occupied by me and my family.

    Thank You,

    Carlos Reynoso

    • Joe Wallace says:

      It would depend on the lender–a lender might be willing to work with you after two years if your credit history and FICO scores are good, but it would depend on the individual lender you’re working with.

  3. Do all homes need an inspection and an appraisal? My sister-in-law is the seller,her mom’s home, and is worried do to and older kitchen FHA may not give me a loan. The home is in good condition and the family already did an appraisal in order to get an asking price.

    • Joe Wallace says:

      FHA loan rules require all homes to be purchased with an FHA guaranteed home loan to have an appraisal as a condition of loan approval. A home inspection is optional, but strongly recommended for the borrower’s protection and peace of mind.

  4. Linda Greene says:

    My husband and I own half of the home we live in; the other half is owned by my Mother. We wish to obtain financing to pay my mother for her half-interest, thereby owning the whole home at the end of the transaction. Can this be done with an FHA loan? And would this be a purchase or cash-out refinance?

    • Joe Wallace says:

      It’s a unique situation you may need to discuss with a loan officer, but it sounds as though a cash-out refinance may be the right approach. You can apply or get pre-approved for a cash out refinance loan at, which is a private company and not a government agency. Someone will be in touch after your information has been processed.

  5. rose p says:

    Would a NHS downpayment grant be considered an unacceptable source?

  6. Elise E says:

    I am in MD and I am wondering for a FHA loan, if my personal savings isn’t quite enough to cover my minimum down payment and closing cost if using some of a student loan to cover the rest would be an acceptable source or do you think it would be scrutinized? Would it have to be less then 1.5% of the amount for down payment or did I misunderstand?

    • Joe Wallace says:

      You would have to review the terms of your student loan contract to see if the use of such funds in the manner you describe is acceptable, then check with the lender to see if the source of your down payment funds is acceptable. We couldn’t advise you–it depends on the legally binding agreement you signed on the student loan and what the lender would accept.

  7. Nikki says:

    My husband and I are trying to buy a home. We have the 3-3.5% down required, I have $1500.00 for the realtor earnest money, the appraisal and the inspection. Is that all the money I will need up front. We are asking seller to pay closing. Since we can ask them that 6% goes to pay to closing. SO, if seller pays closing. I have money for the down payment, earnest money, appraisal and inspection- that will be all I need, correct?

    • Joe Wallace says:

      It’s difficult to say–your lender may have required fees or charges such as flood zone determination or other factors. It’s best to discuss the particulars with a loan officer. State law, taxes or other issues may affect the final amount of the money needed to close.

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