An FHA loan is a mortgage insured by the Federal Housing Administration. These loans are available to homeowners who may not qualify for traditional programs. They offer borrowers affordable down payments (as low as 3.5%), low closing costs, and less stringent application requirements.
This comprehensive guide can help you understand the essentials of taking out an FHA mortgage.
One big difference between FHA loans and conventional loans is the down payment. Before applying for an FHA loan, the primary concern for most homebuyers is regarding the FHA down payment requirements. Two most commonly asked questions regarding the down payment for FHA loans are: How much down payment should I need to come up with and what are possible sources of my down payment. You’ll find the answers here.
Some borrowers mistakenly think that FHA rules for down payments vary from state to state. However, it’s just a mistaken impression. The truth is that FHA rules for down payments apply to almost all U.S. states. It means that your down payments may be the same no matter where you live.
How much down payment do you need for FHA?
FHA loans are the perfect home loan solution for low- and medium-income families since they only need to pay a small portion of down payment. If you qualify for receiving an FHA loan, your down payment for the loan can be as low as 3.5% of the purchase price. An FHA loan can help finance most of your closing costs and other related fees. The minimum down payment amount is available on 1-4 unit properties.
When you qualify for the minimum down payment of 3.5%, your down payment will be $14,000 if you’re purchasing a $400,000 home. However, if you do not know the exact sales price of your dream house, you will have no idea of the specific figure for the down payment you need to pay.
But not every FHA loan applicant qualifies for the minimum down payment.
Two important factors will affect your down payment amounts: your creditworthiness and regulations of specific FHA lender.
Generally, you must have a credit score of at least 580 to be eligible for the 3.5% minimum down payment. Now many FHA lenders require borrowers to have a credit score of 620 or higher. Your credit score not only determines your down payment for an FHA loan but also affects your mortgage rates and terms.
Be sure to check your credit report right now. If your credit worthiness disqualifies you for the lowest possible down payment, try to improve your credit scores prior to submitting your mortgage application with an FHA-approved lender. Otherwise, you will have to pay a larger amount of down payment. If you have a credit score between 500 and 580, a minimum of 10% down payment is required if you want to receive an FHA-insured mortgage loan.
Each FHA-approved lender has specific regulations on down payments. Though most banks offer first-time homebuyers the chance of qualifying for the minimum 3.5% down payment, like U.S. Bank, some lenders may have higher down payment requirements. One example is Bank of America.
If you’re applying for an FHA loan through Bank of America, your minimum down payment can range from 5% to 20% of the house’s sales price. Bank of America determines your exact down payment based on several factors, including your loan amount and your credit history. However, you cannot get an FHA loan from Bank of America with a down payment lower than 5%.
Now it can be easy to find that your down payment is usually determined by several factors. If you want to come up with the exact amount of the down payment for an FHA loan, please contact your potential lender and ask about their FHA loan rules on down payment. Each lender’s requirements on FHA loan down payment might vary due to a variety of reasons.
FHA Loan Down Payment Sources and Documentation
I guess many FHA loan applicants also want to know the possible sources of down payments. Since the down payment is not included in the cost of an FHA loan, you must pay the down payment up front. According to the FHA rules, there are various acceptable sources for the down payments of FHA loans.
As for your down payment, most FHA lenders will accept cash from savings & checking accounts, private savings club funds and other types of accounts. Of course, many other types of funds are also accepted, such as savings bonds, investment accounts (like IRAs and 401k accounts), gift funds and the money from the sale of personal property.
Given the fact that your down payment can be up to 10% of the home’s sales price, it can be a considerable amount of money. Plus the down payments must be paid through any of the above down payment money sources. You’d better plan your budget for an FHA home loan as soon as possible if you want to avoid financial strain at the closing time.
Step-by-Step FHA Loan Process
Taking out an FHA loan is very similar to taking out a traditional mortgage. Here’s what you can expect.
- Decide if an FHA mortgage is right for you. FHA loans can be a lifesaver if you have a shaky credit history or if you don’t have enough for a 20% down payment. But, they aren’t the best choice for everyone. Explore this site and talk with a mortgage professional to decide if this is the right option for your circumstances.
- Find an FHA lender. Most lenders and mortgage brokers can help you take out an FHA loan. But, not everyone is experienced with the program. Try to find someone who has years of practice submitting FHA applications. (Remember: the Federal Housing Authority insures these loans, they don’t actually create them. You will need to go through a lender).
- Get pre-qualified. When you meet with a lender, he can make an initial determination about whether or not you can qualify for a loan. Give him some basic information about your income, credit, etc. and he will let you know how much you will qualify for. A pre-qualification letter can be used to show the sellers you’re serious when you submit an offer on a home.
- Submit your application. Once you’ve signed a purchase agreement for a property, it’s time to apply. Your FHA loan application will require information such as W-2 forms, employment and salary information, tax returns, and paycheck stubs. As a part of the application process, the underwriter will run a credit check and call your employer. You will be charged for an appraisal of the property.
- Complete any necessary inspections. As the loan is being processed, you will be given the opportunity to do an inspection of the property. Take advantage – now is the time to determine if there are any costly problems such as mold or water damage. If problems are found, the seller may be willing to pay for repairs or you may be able to back out of the transaction.
- Close. Most FHA loans close in less than 40 days. The closing process can vary from state to state. But, in general, you will meet at a title company’s offices and sign the necessary paperwork. You will submit a cashier’s check for the down payment and required closing costs. Once the paperwork is processed, you will be given the keys.
Frequently Asked Questions About FHA Mortgage Programs
What is an FHA Loan?
Borrowers with less-than-perfect credit and little money saved for closing are often able to purchase a home by taking out an FHA loan. The Federal Housing Authority, a government agency, offers this program to help more Americans qualify for a loan.
How FHA Loans Work
In a nutshell: Most mortgage brokers and lenders offer FHA loans as an option to their borrowers. When a borrower signs a mortgage agreement, the FHA guarantees that the lender will be paid – even if the borrower defaults. This gives the lender the reassurance to issue a potentially risky mortgage.
Borrowers taking out an FHA loan will pay an additional fee called “mortgage insurance” with their monthly bill. If the borrower makes the payments on time for five years or if the balance of the loan falls to 78% of the home’s value, the borrower is generally allowed to stop paying mortgage insurance.
Qualifying for an FHA Loan
Borrowers taking out an FHA loan don’t have to meet all of the strict qualifications required for traditional loans. However, not everyone is accepted to this program. In general, FHA borrowers must demonstrate the ability to pay the mortgage each month by having an acceptable debt-to-income ratio. They must turn in W-2 forms from their jobs and have a credit check.
FHA loans are more lenient about bankruptcies and foreclosures. Borrowers can finance up to 97% of the loan, and provide only a 3% down payment at closing. FHA regulations also ensure that borrowers pay lower closing costs than is expected with traditional loans.
Where to Get an FHA Loan
The Federal Housing Administration does not give loans, they only insure them. Almost all traditional lenders and mortgage brokers are able to help borrowers secure FHA loans. However, some have more knowledge about the program and are better able to guide their clients through the process. Call the lender of your choice and ask about their experience with the program.
FHA Loan Pros and Cons
FHA loans can be a lifesaver to borrowers with credit flaws and little cash. These loans open up doors for people who might not otherwise qualify. However, the FHA program isn’t for everyone. If you have good credit and the ability to make a 20% down payment, consider taking out a traditional loan instead. You’ll be able to avoid the mortgage insurance fee each month, potentially saving you thousands.