Many potential homeowners are intimidated by the idea of saving up for a down payment. But there are resources available that make getting your down payment money together easier including down payment grants and low down payment mortgages like the FHA home loan program. What do you need to know about low down payment loans?
FHA Home Loan Down Payment Rules
FHA loans only require a 3.5% down payment for borrowers who qualify with FICO scores at 580 or better (FHA standards. Lender standards will also apply) .
Where Does Your Down Payment Money Come From?
FHA loans say you can pay your own down payment or get help with a down payment grant or gift funds.
FHA loan rules require the source of your down payment funds including gift funds to have proper sourcing and that means not breaking the rules for where your gift money comes from. If you have a down payment grant from a local agency, the agency should provide help with documentation. If you get it from a private source that documentation will need to be provided.
Be sure to obtain a letter with any down payment gift from the gift giver that explains the amount, a statement that the money is a gift with no expectation of repayment and explain that the gift did not come from unallowed sources like cash advances on a credit card, payday loan, etc.
Seller Concessions Can Help
It is true that home sellers cannot help their buyers in any way with the down payment, the seller IS permitted to provide help with closing costs up to six percent of the sale price of the home when purchasing with an FHA mortgage.
This practice is called a seller concession. It is NOT automatic and must be negotiated with the home seller.
The seller is restricted to providing up to six percent. Any amount more is considered an inducement to purchase and the loan amount is reduced dollar for dollar by the amount over six percent.
Are FHA Loans The Only Low Down Payment Option?
Why do FHA home loans feature lower down payments than some conventional mortgages? Part of the answer comes from the fact that FHA loans are backed by the federal government, reducing the risk to the lender.
While it’s true that there is a three percent down loan called the Conventional 97 which actually features a lower down payment requirement than FHA mortgages this loan can feature restrictions which make it far less flexible than an FHA mortgage.
FHA Low Down Payment Loans Versus Conventional 97 Mortgages
Conventional 97 loans are what their name implies–these are home loans that only require three percent down. But they can feature restrictions including allowing only fixed-rate mortgages (FHA loans allow you to apply for an adjustable-rate mortgage if you so choose), the home must be only a single unit, and you cannot buy a manufactured home with some Conventional 97 mortgages.
What does the FHA home loan offer in contrast to the Conventional 97 loan? Quite a bit for a slightly higher down payment:
- 3.5% down
- Manufactured homes, mobile homes, and modular homes are FHA loan-eligible
- Gift funds accepted for the down payment
- Purchase a home with up to four living units
- No first-time homebuyer requirement
- FHA loans permit Jumbo loans in excess of the loan limit for that housing market unlike Conventional 97 loans
- No penalty for early payoff of the loan