FHA home loan down payment rules you should know include the minimum amount down, acceptable sources of down payment funds, and how other closing costs and associated expenses related to your down payment requirements.
Do you know how your chosen FHA lender will calculate your down payment? Knowing before you apply can help plan and save for this and other required closing costs.
FHA Loan Down Payments: A Minimum Required Investment
FHA loan rules in HUD 4000.1 refer to the down payment as a minimum required investment (also referred to as an MRI for short), not to be confused with the borrower’s Total Required Investment, described in HUD 4000.1 as:
“Total Required Investment refers to the amount the Borrower must contribute to the transaction including the Borrower’s downpayment and the Borrower-paid transaction costs. The Total Required Investment includes the Minimum Required Investment (MRI).”
Your basic, absolute minimum down payment is 3.5% of the adjusted value of the property. The lender arrives at an amount for the adjusted value of the property based on the results of the FHA appraisal, which is one reason why appraisals are required for new purchase home loans.
FHA Loan Down Payment Rules: Acceptable Sources
FHA loans have strict rules about the source of the borrower’s down payment. The funds can come from the borrower’s savings, cashed-in investments, gift funds from others (the funds must meet FHA requirements), even down payment assistance (again, that meets FHA standards).
FHA down payment money cannot come from unapproved sources such as payday loans, cash advances, any indebtedness that is considered “non-collateralized”. Borrowers will need to discuss their down payment sources with the loan officer to insure that both FHA standards and lender requirements are met in this area.
Gift funds provided to a borrower for down payment purposes must be a legitimate gift with no expectation of repayment. Furthermore, those providing gift funds for FHA loan down payments will also need to have the source of those funds verified to make sure they do not come from any unapproved sources as mentioned above.
FHA Loan Down Payment Requirements: FICO Scores
Borrowers with FICO scores that fall below 579 are required, according to FHA loan rules, to pay more money down. FICO scores between 500 and 579 require 10% down (based on the the adjusted value of the property) instead of 3.5% down. Lender standards will often apply above and beyond this; borrowers should not be surprised to find higher FICO score requirements apply depending on the lender.
FICO scores can and do affect the amount of your down payment. They also affect the interest rate offered to you and other factors depending on the lender. It’s a very good idea to know the lender’s credit score requirements for FHA mortgages and how those credit score ranges affect your down payment requirements.