Last Updated on May 31, 2023 by Bob Filipczak
An FHA loan down payment can put homeownership in your reach, even if you don’t have a great credit score. As you know, coming up with a down payment is one of the most significant hurdles to overcome, especially if you are a first-time homebuyer. How does the FHA system work, who is eligible and how do you apply? Let’s take a look at all of it.
What is the FHA Loan?
The FHA home loan down payment program is a mortgage insured by the Federal Housing Administration and given by approved private lenders. Technically it’s not really a loan; It’s a loan guarantee. An approved private lender or bank actually gives you the money, while the FHA agrees to stand behind it. As with any home mortgage, you will be primarily working with a lender, broker or bank. When you have the FHA guaranteeing your loan, it changes the dynamic quite a bit. It’s like having your parents co-sign the loan, but in this case the co-signer is the federal government.
Congress created the Federal Housing Administration in 1934 to stimulate the housing market after the Great Depression. The purpose of this program is to help Americans find and own a home. For example, if you qualify for an FHA loan guarantee you only need to pay a 3.5% down payment. Typically down payments are a lot more than that. For first-time homebuyers, the FHA loan guarantee is a glimmer of hope in the dog-eat-dog real estate markets. There are other benefits listed below.
These loan guarantees are for low to moderate-income earners who also have low credit scores. Read that again. If you have a low credit score, you need to know more about the FHA down payment program. The combination of a low down payment and relaxed credit requirements make the FHA loan guarantee ideal for anyone who is searching for affordable housing.
Homes for Heroes Helps Heroes with the FHA
At Homes for Heroes we have been helping community heroes navigate the FHA system for more than 20 years. We have specific articles for many of our hero groups as a way to help them understand the sometimes complex world of the FHA loan down payment program.
- FHA Home Loans for Educators
- FHA Loans for EMS Professionals
- FHA Loans for Police Officers
- The FHA vs VA Loans (for armed forces personnel and veterans)
- FHA Home Loans for Nurses
- FHA Homes Loans for Law Enforcement
- FHA Loans for Teachers
- FHA Home Loan for Healthcare Professionals
Benefits of the FHA Loan Down Payment Help
Here are some of the advantages of FHA loans:
- Smaller Down Payments – The FHA has a minimum down payment of 3.5% of the total home loan. Typical mortgages require up to 20%. Your down payment percentage may vary if you have a credit score below 580.
- Flexible Approval Requirements – The qualification criteria are not as strict as you find on conventional loans.
- Lower Credit Scores – If you have a low credit score and cannot get a loan from conventional lenders, the FHA loan was designed with you in mind.
- Assumable – FHA loans are assumable. That makes them a rare loan in the world of mortgages. An assumable loan lets you sign your current mortgage over to a potential buyer without going through the application process. What’s more, they can assume your loan at the interest rate you locked in when you bought the home. That becomes a huge advantage for a seller in a real estate market where interest rates have gone up
- Not Just for First Time Home Buyers — The FHA program is for everyone, not just first time homebuyers.
Drawbacks to the FHA Loan Down Payment System
While there are some drawbacks to a FHA home loan guarantee, they are still better than a conventional mortgage loan in a number of ways. Here are the things to look out for:
- If your credit score falls below 580, you can still get an FHA loan guarantee, but you will need to make a 10% down payment.
- There are upper limits to the amount of mortgage you can get with an FHA loan down payment guarantee. For a single unit home, the upper limit is $475,030, but it varies a bit by state. It’s a good idea to check out the limits for your state.
- An FHA loan guarantee requires two FHA mortgage insurance premiums. The first is an upfront mortgage insurance premium of 1.75% of the entire loan, called the Mortgage Insurance Premium (MIP). That upfront fee can be folded into your mortgage payments if you want to. Then, in addition, you will also be paying a monthly payment for the life of the loan, just as you might with conventional loans. The rates on these annual mortgage insurance premiums range from 0.45% to 1.05% depending on the size of the loan and how long you pay it.
How to Be Ready for Your FHA Loan
The FHA loan down payment program is designed for home buyers who have moderate incomes and modest credit scores. Because you will be working with both the FHA and a FHA-approved lender to finalize your mortgage, there are some things you will need to do to get ready for approval.
- Have Verifiable Income – To qualify for an FHA loan requirements, you need verifiable income. That means your lender will need to see your tax returns or pay stubs. They will also want to verify that you have been working for at least the last two years, although it does not need to be for the same employer.
- Be Able to Afford Payments – A DTI (Debt-to-Income) ratio is something that often comes up when you are working on qualifying for a mortgage. In the case of an FHA guarantee, your monthly mortgage payment should not be more than 35% of your total wages before taxes. In addition, your total debt should not be not more than 48% of your earnings. If your income isn’t going to cut it, you will need to work on paying off some debts.
- Save for Down Payment – While the FHA loan guarantee reduces your down payment requirements dramatically, you will probably still need to add to your savings to make the 3.5% down payment. If your credit score is less than 580, your down payment will probably jump to 10%. There are also other closing costs at closing that you should discuss with your real estate agent or mortgage broker.
- Establish Your Credit History – Your private lender will check your credit history. If you do not pay your other debts on time, it will make it harder to get the loan. While the credit score minimum for the FHA home loan guarantee is 580, your lender might want something higher. If you have a low credit score, make sure that your preferred lender accepts that score. If you do not know your credit score, you can use online resources to look it up.
- Get a Home Appraisal – Both the FHA and your private lender want to make sure the house you are buying is worth what you are paying for it. The FHA will send one of its approved appraisers to look at the home and evaluate the financial value of the property. An appraisal is different from an inspection. The inspection is for your safety and to make sure you don’t end up in a money pit.
If you want to dig deeper, we have an FHA loan calculator that can help you prepare for the application process.
Steps to Apply for the FHA Loan Down Payment Program
Applying for an FHA loan is fairly similar to applying for any type of home loan, with a few exceptions. Here are 5 basic steps to follow:
Complete an FHA loan application. You’ll need basic information about your income, monthly debts and down payment funds as you fill out the application.
- Give the lender permission to verify your credit scores. FHA-approved mortgage lenders will pull a credit report to verify that you meet the minimum FHA credit score requirement.
- Provide two years of employment and income history. Collect pay stubs for the last 30 days and the last two years of W-2s or federal tax returns, along with employer contact information.
- Document your down payment source. Lenders typically review two months’ worth of bank statements. If some of the money is a gift from a family member or close friend, the lender will want a letter explaining where the down payment and closing cost funds are coming from. You might need a few months’ worth of cash reserves in the bank if your credit scores are below 580 or your DTI ratio is high.
- Explain and document any defaulted federal debt. If you recently paid off defaulted student loans or other government debt, provide a document that explain that.
Down Payment Gifts Are Allowed
In some cases, homebuyers may receive gift funds from family members or close friends to contribute to their down payment. That’s allowed with the FHA loan program. There are rules around it, but your mortgage specialist can help you navigate that. Eligible gift donors for your down payment include:
- Labor Union
- Nonprofit Organization
- A Government Agency that help first-time buyers
Some organizations are prohibited from giving you gift money for your down payment, such as home builders, real estate agents, real estate brokers and sellers (unless the seller is a family member)
Homes for Heroes
Key to getting approved for an FHA loan guarantee is working with a private lender. Homes for Heroes has been connecting community heroes with mortgage specialists for more than 20 years. If you work with one of our teams, we will also send you a Hero Reward check after closing (average check is $3,000). It’s our way of thanking you for your service.