There are persistent myths and misunderstandings about home loans.
One persistent myth is that FHA mortgages are only approved for first-time home buyers. Another is that FHA loans are only for low to moderate-income borrowers.
And a third–and the focus of our article–is that you have to make a 20% down payment on a home loan.
What’s the reality?
FHA home loans do NOT require a 20% down payment, even if you are at the lower end of the qualifying credit score range. According to FHA loan rules, the most you are required to put down on an FHA mortgage (on paper, according to the FHA) is 10%. That is for borrowers who do not have FICO scores that qualify them for 3.5% down.
So why do people think you have to put 20% down on a house?
One reason is because conventional mortgages require a 20% down payment for the borrower to avoid having to pay mortgage insurance. It is not surprising that people want to consider eliminating that particular expense altogether and indeed, some do pay 20% down on a house in order to do just that.
But FHA mortgages don’t require this, and even if you DO pay 20% down you won’t eliminate the FHA mortgage insurance requirement, which applies to all FHA forward mortgages.
Your FHA mortgage insurance requirement includes both an Up-Front mortgage insurance premium (this can be financed into the loan amount or paid in full at closing) and monthly mortgage premium.
Depending on the loan-to-value ratio and other variables, your requirement to pay mortgage insurance lasts either 11 years or the duration of the loan amount.
What if a borrower wants to make a larger down payment anyway? Even though a 20% down payment is not a mortgage insurance-killer, the benefits of doing so include a more affordable loan–your principal balance is lower and the interest charged is therefore less over time, too.
They also include a faster loan payoff and without a penalty for paying off the mortgage early. You have to read the fine print on conventional loans to determine whether they feature a penalty when you pay off early, sell the home, or refinance it.
FHA loans do not need such stipulations in the fine print because federal law prohibits the lender from charging FHA borrowers to pay off their mortgage loans early.
One benefit of making a down payment yourself is that you can also apply for the down payment and closing cost assistance with programs offered by your city or state.
The money you pay along with the down payment help could really make a difference in the final tally of your monthly mortgage obligation.
If you aren’t sure whether paying more upfront could help, have a conversation with a loan officer and explain your financial needs and goals. A good loan officer will listen and try to find ways to help meet your needs.