June 4, 2021
Do you worry about making a down payment on a home loan? There are home loans that require higher down payments than others but the FHA loan program requires only 3.5% down for borrowers with qualifying FICO scores.
FHA loan rules in HUD 4000.1 say:
- Borrowers with FICO scores at 580 or higher qualify for the lowest down payment.
- Borrowers with FICO scores between 500 and 579 are required to put 10% down.
- These are FHA guidelines, not individual lender standards.
FHA home loans don’t have a zero down payment option, but FHA construction mortgages allow the borrower to use land equity as part of the down payment where applicable.
But borrowers don’t always have to make the downpayment themselves thanks to down payment assistance programs that can help.
Here are some facts about down payment assistance programs:
- Down payment assistance is offered by local agencies. You will need to search for one near you.
- Down payment assistance is not offered by the FHA itself.
- Down payment programs are often offered to help with both closing costs and the down payment.
Down payment assistance comes in several forms:
- Down payment grants, which do not have to be repaid as long as the borrower meets the terms and conditions of the program.
- Down payment second mortgages, which may be forgivable after a certain amount of time assuming the borrower meets program requirements.
Down payment grants cannot be loans disguised as gifts. There can be no expectation of repayment for a legitimate gift. Second mortgage-type down payment assistance should be considered carefully–make sure you fully understand the terms and conditions of the program.
Some FHA mortgages technically permit such assistance but in cases of construction loans, your participating FHA lender may not permit down payment grants or other such assistance. Otherwise, most FHA loans can include such help.
Your lender will have specific procedures for accepting down payment assistance. Documentation rules must be followed and the funds must be sourced properly.
Down payment assistance (from a program or from a private individual) may come from any of the following sources:
- Relatives
- Friends
- Co-workers
- Local government programs
- Private agencies
Down payment assistance cannot come from the seller, or from third parties that may have a financial interest in the transaction. No matter where the money comes from, it must be sourced properly. That means the money for your down payment (regardless of where it comes from) cannot be sourced from:
- Payday loans
- Pink slip loans
- Credit card cash advances
- Credit card “checks” that function like a cash advance
- Other non-collateralized loans.
Remember how we mentioned above that the seller cannot contribute toward your down payment? The seller IS permitted to contribute up to six percent toward your closing costs. That means money you yourself saved and were going to put toward other closing expenses could now go toward your down payment.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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