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FHA Loan Down Payment: Guide to 3.5% Down Homebuying

FHA Loan Down Payment: Guide to 3.5% Down Homebuying
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Home.com Contributor

FHA loan down payment: Fast path to homeownership

There was a time when buying a home meant saving every penny until you had a 20% down payment. These days, you can get into a home for a lot less, thanks to FHA loans and other low down payment mortgages.

You can get an FHA loan for just 3.5% down. For most people, that moves the homebuying timeline up by years — perhaps by more than a decade.

And there’s more good news: Money for your down payment can come from a variety of sources, including gifts from family members or grants from down payment assistance programs.

What's in this Article?

How much do you need for an FHA loan down payment?
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FHA loan down payment chart
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Can you use down payment assistance on an FHA loan?
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Using gift funds for your FHA loan down payment
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FHA down payment vs Conventional, VA, USDA loans
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How to save quickly for a down payment on an FHA loan
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FHA down payment FAQs
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How much do you need for an FHA loan down payment?

Homebuyers with FICO credit scores of 580 or higher can get an FHA loan with 3.5% down. On a $200,000 home, 3.5% equals $7,000. That’s a far more attainable savings goal than the $40,000 you’d need to save for a 20% down payment on the same home.

Saving money for a big down payment delays homeownership for many Americans because it’s hard to save while also paying rent.

That’s particularly true for would-be homebuyers with significant student loan debt. A Federal Reserve study found that Millennials with student debt were significantly less likely to buy homes, possibly because it’s difficult to save for a down payment while making high student debt payments. Student loans can also drag down your credit score, making it even harder to qualify, the Fed found.

But the low FHA loan down payment requirements, combined with the low credit score minimum, can help more Americans become homeowners sooner.

And that’s important, because homeownership is crucial to most Americans’ wealth-building strategies. The earlier you buy, the more you stand to gain from growing your home equity.

The median down payment for first-time homebuyers in the U.S. is just 6%, and FHA allows you to buy a home for even less up front.

FHA loan down payment chart

Your FHA down payment will vary depending on your home price. This chart compares the FHA’s minimum down payment of 3.5% to the traditional 20% down payment some experts still recommend.

Home Price
FHA Down Payment (3.5%)
Conventional Loan “Traditional”
Down Payment (20%)
Difference

$150,000$5,250$30,000$24,750
$200,000$7,000$40,000$33,000
$250,000$8,750$50,000$41,250
$300,000$10,500$60,000$49,500
$400,000$14,000$80,000$66,000
$500,000$17,500$100,000$82,500

Clearly, you can get into a home much faster if you pursue the FHA’s low down payment option.

But if you can easilyput down more than 3.5%, you might consider it. A larger down payment can mean a lower interest rate, since the lender is taking on less risk.

You’ll also pay less in mortgage insurance. FHA loan requirements stipulate that borrowers must pay an upfront and annual mortgage insurance premium (MIP). If you put down less than 10% — which most people do on an FHA loan — you’ll owe MIP for the life of the loan.

The MIP falls off after 11 years if you put down more than 10%. But if you have that much saved upfront, you may be better served by a conventional loan (more on those in our comparison section below).

Your MIP rate decreases the more you put down. It also varies based on whether you take out a 30-year or 15-year loan.

Just keep in mind that the more you put down, the lower your emergency fund will be. And during a job loss or medical event, you may wish that you had kept more cash.

MIP rates for a 30-year FHA loan

Loan amountDown paymentMIP per yearHow long you’ll pay
$625,000 or lessLess than 5%0.85%Life of the loan
$625,000 or less5% – 9.99%0.80%Life of the loan
$625,000 or less10% or more0.80%11 years
Greater than $625,000Less than 5%1.05%Life of the loan
Greater than $625,0005% – 9.99%1%Life of the loan
Greater than $625,00010% or more1%11 years

Bolded row is the most common scenario for FHA buyers

MIP rates for a 15-year FHA loan

Loan amountDown paymentMIP per yearHow long you’ll pay
$625,000 or lessLess than 10%0.70%Life of the loan
$625,000 or less10% or more0.45%11 years
Greater than $625,000Less than 10%0.95%Life of the loan
Greater than $625,000Between 10% and 22%0.70%11 years
Greater than $625,00022% or more0.45%11 years

It’s okay if all you can manage is a 3.5% down payment. FHA loans are designed to help creditworthy homebuyers who don’t qualify for a conventional mortgage.

It’s okay if all you can manage is a 3.5% down payment. FHA loans are designed to help creditworthy homebuyers who don’t qualify for a conventional mortgage.

You can always refinance to a conventional mortgage once you have 20% home equity to stop paying MIP. In the meantime, you’ll be building wealth through your property and you’ll have the sense of pride and security that comes with owning your own home.

Here’s a tip on scoring the FHA’s loan down payment option: While saving, make sure you’re also monitoring your credit score. You need a FICO score of 580 or higher to qualify with 3.5% down. Borrowers with credit scores between 500 and 579 can still get an FHA loan with some lenders, but they need to put down 10%.

Can you use down payment assistance on an FHA loan?

Down payment assistance (DPA) programs throughout the U.S. help borrowers make their FHA loan down payments.

In fact, about 40% of FHA home buyers used down payment assistance or a down payment gift from family in 2020.

What is down payment assistance? Program terms vary, but the general idea is to help potential homebuyers across the finish line by covering some or all of their down payment costs.

Assistance comes in different forms depending on the program. Terms may include:

  • Grants: A down payment assistance grant does not need to be repaid
  • Forgivable loans: Some programs offer DPA as a forgivable second loan on the house. You don’t need to make payments as long as you stay in the home for an agreed-upon period of time, and the loan is forgiven after that point. If you sell the home before the loan is forgiven, you may need to repay some or all of the down payment assistance
  • Deferred loans: With deferred loan programs, you repay the funds when you sell or refinance your home. Most of these programs charge 0% interest on the down payment assistance loan
  • Low-interest loans: These programs help you borrow your down payment using a separate loan with a low interest rate. Then you’d repay this smaller loan along with your primary mortgage

Some areas offer assistance programs that match the amount you save for a down payment. For example, if you saved $4,000 the program would provide another $4,000.

Some assistance programs — especially grants — require borrowers to attend a short class about the basics of mortgages and homeownership.

40% of FHA home buyers used down payment assistance or gift funds in 2020

How to find down payment assistance programs

Down payment assistance programs vary by state, city, and sometimes even by ZIP code. These programs can set their own criteria: Some help only first-time home buyers; others help only low-income borrowers. There are a lot of down payment assistance programs out there, so do a search for down payment assistance programs in your city, county, and state.

The Department of Housing and Urban Development (HUD) website is a good jumping-off point for finding out what’s available in your state, but don’t stop there. Many down payment assistance programs are not listed in the HUD resources, and you don’t want to leave money on the table.

You can also check your city or county governments’ websites. Ask your realtor about programs in your community as well.

Using gift funds for your FHA loan down payment

If you can’t find a down payment assistance program in your community, or you don’t qualify for one, you can still get help in the form of a gift. The FHA lets borrowers use down payment money given by family members, friends, charitable organizations, and even their employers.

Say you recently graduated from college or a master’s program, and your family and friends want to buy you presents. You might gently ask for help toward your down payment instead. Or, if you’re set to inherit money from a relative in the future, you could ask for part of that money now.

Document every penny

Keep in mind that any down payment gifts must be documented. If someone is covering part or all of your down payment, ask them to write a check or transfer it into your bank account. Your lender’s underwriting team must have a paper trail to document where any mortgage-related funds came from.

You’ll also need the person who makes the gift to sign a letter that says the money is a gift and that they don’t expect repayment. A new loan —  even one from a family member —  changes your debt-to-income ratio (DTI) because it increases your monthly debt payments.

Mortgage lenders have to take all of your debts into account, no matter how long your relative says you have to pay them back or whether they offer to let you defer repaying their loan.

Asking family and friends for this kind of help isn’t always easy. Money is a sensitive topic, after all.

But some relatives might enjoy helping you reach the goal of homeownership, and they may be excited to contribute to your future rather than giving gifts that will lose their value in a few months or years.

Either way, try to keep emotion out of the equation. If your loved ones say no, listen to their reasoning and thank them for their time. If they say yes, make sure they understand all of the rules associated with gift funds and that they’re willing to provide the gift letter and send the funds in a way the lender can document.

Acceptable FHA down payment gift donors

The FHA regulates the ways you can use gift money in a down payment. The funds must be a true gift. The donor cannot expect repayment of the money, and they cannot expect partial ownership of the home.

Acceptable FHA down payment gifts can come from:

  • A relative
  • An employer or labor union
  • A close friend
  • A down payment assistance grant program

Who can’t give an FHA down payment gift?

Money for your FHA down payment cannot come from anyone with an interest in the home transaction, including:

  • The seller or the seller’s Realtor
  • The buyer’s Realtor or mortgage broker
  • The home’s builder

Down payment money also can’t come from anyone associated with those on the above list. For example, a realtor’s business partner or relative may not give the money.

FHA lenders will require careful documentation in accordance with Federal Housing Administration guidelines. Tell your loan officer and Realtor if you plan to use a gift toward your down payment. They’ll explain exactly what they need from you and the person who is making the gift.

FHA down payment vs Conventional, VA, USDA loans

FHA isn’t the only loan program with affordable down payment requirements. Some loan programs require 0% down, though not everyone can qualify for those.

Other low down payment loans:

  • VA Loans: This program for active-duty military members, veterans, and some surviving military spouses offers 0% down payment loans and no mortgage insurance
  • USDA Loans: This 0% down payment program for low- and moderate-income borrowers is available in rural and some suburban areas. Borrowers must meet the USDA’s income and geographical requirements
  • Conventional Loans: Many conventional loan programs allowyou to qualify with 3% down, but you often need a higher credit score and lower debt-to-income ratio than with an FHA loan. 
Mortgage Loan TypeMinimum down payment requiredEligibility Criteria
USDA0%Income limits; must buy in a qualifying rural or suburban area
VA0%Veteran or active-duty military and surviving spouses who have not remarried
Conventional3%620 credit score; 45% or lower DTI
FHA3.50%580 credit score; or 500 credit score with 10% down

How to save quickly for a down payment on an FHA loan

Can’t rely on gifts or down payment assistance programs and need to save up the cash yourself?

Here are some ways to reach your FHA loan down payment goal more quickly:

  • Automate your savings: Setting up automatic deposits into savings after every payday turns saving money into a habit. After a while you won’t really miss the money you’re putting away —  much like you probably don’t miss the income tax or 401(k) deductions from your paycheck.
  • Spend less: Cutting back on regular monthly expenses leaves more money for saving. Find a budget TV streaming service or start making coffee at home, for example. But make only reasonable spending cuts you could live with for a couple years. Drastic cutbacks may be too hard to sustain
  • Look for lower-priced homes: More expensive homes require a bigger down payment which takes longer to save up. Shopping lower-priced homes outside of the most popular neighborhoods or that need some fixing up could make you a homeowner sooner
  • Earn more money: Consider asking for a raise if you haven’t gotten one recently. Or you could pick up a side hustle or a part-time job. Put all your extra earnings into your down payment fund

Being flexible in your home search can make a big difference to how much you need to save. A $150,000 house may not have your ideal square footage or the second bathroom you want. But you’ll only need $5,250 down with an FHA loan. Compare that to the $8,750 you’d need to buy a $250,000 home with 3.5% down.

The higher-priced home might be more spacious and have some new fixtures. But if you can live with a few compromises, knowing you can renovate down the road, you’ll have your down payment in hand much sooner.

Closing cost assistance maximizes your savings

The down payment is only half of the equation when it comes to closing on a home. The other large chunk of money you’ll need are closing costs. 

Closing costs include lender’s fees, legal fees, and your upfront FHA mortgage insurance premium, which equals 1.75% of the loan amount (but can be rolled into the loan). Together, these costs can total 3-5% of your loan amount.

But don’t lose heart. You don’t have to cover these costs alone. Lenders, agents, and even the seller can pay some or all of your closing costs, so negotiate these early on in the process.

Here’s who can help with your closing costs:

  • The seller: Sellers can help cover closing costs. If they’re willing, you’ll need to build this into the sale contract. Your real estate agent can help you with this, so make sure they know you want the seller to contribute before you make an offer
  • Your lender: Your lender may contribute to closing costs in exchange for a higher mortgage rate
  • Closing cost assistance programs: Much like down payment assistance, state and local organizations sometimes offer closing cost assistance in the form of grants or forgivable loans

As with your down payment, friends and relatives can also make a financial gift to cover the closing costs.

FHA down payment FAQs

What is the minimum FHA down payment?

The minimum FHA down payment is 3.5%. Applicants with credit scores between 500-579 must put down at least 10%.

What is the average FHA down payment?

The average first-time homebuyer in the U.S. puts 7% down, according to the National Association of Realtors. But most FHA borrowers put down less than 5%.

What happens if I put 20% down on an FHA loan?

If you put 20% down on an FHA loan, you would pay a lower annual mortgage insurance premium. The premium requirement would also stop after 11 years.

However, if you have 20% to put down and your credit score is 620 or higher, you may want to pursue a conventional loan instead. Conventional loans do not require mortgage insurance if you put down 20%, and the private mortgage insurance (PMI) requirement falls off at 22% equity.

Can you put less than 3.5% down on an FHA loan?

No. But you can use grants or forgivable loans from local down payment assistance programs, as well as gift funds, to reach the minimum 3.5% FHA down payment. FHA loans do not have a minimum borrower contribution, which means a relative, friend, or your employer can pay your full down payment on your behalf.

Can I get an FHA loan with no down payment?

No. FHA loans require at least 3.5% down for borrowers with credit scores of 580 or higher, and a 10% down payment from borrowers with scores between 500-579. The USDA and VA loan programs offer 0% down payment mortgages, but you must meet the eligibility requirements.

Do FHA loans cover down payment?

An FHA loan can cover up to 96.5% of your home’s value, which leaves 3.5% as the FHA down payment minimum. You can use gift funds or down payment assistance to cover the upfront cost.

Are FHA loans a good idea?

FHA loans provide many homebuyers a chance at homeownership much earlier than they’d find with conventional loans. The low down payment and low credit score requirements reduce the barriers to entry and help more creditworthy borrowers build equity in their homes.

What credit score do you need for an FHA loan?

To get an FHA loan with 3.5% down, you need a FICO score of 580 or higher. Borrowers with scores between 500-579 can buy with 10% down.

What is the downside of an FHA loan?

FHA’s low down payment and relaxed credit score requirements open the benefits of homeownership to more Americans, but there’s also a cost: mortgage insurance premiums (MIP). These payments —  paid by the borrower upfront and annually —  insure the lender against losses in case of a default or foreclosure.

If you put 10% or more down, your annual MIP will stop after 11 years. Paying less than 10% down means MIP continues throughout the life of the loan. However, you can refinance out of the FHA loan to a conventional loan when you have 20% equity in the home to eliminate these ongoing costs.

Can you pay off an FHA loan early?

Absolutely. There’s no prepayment penalty on FHA loans. You can pay off the loan early or refinance into another mortgage later. Refinancing into a shorter term loan can save thousands in interest charges while also eliminating MIP. Be aware, though, that you may owe closing costs on a refinance loan. A loan officer can help you determine whether the amount you’re saving warrants those upfront refinancing fees.

Save Now, Buy Sooner

Saving up a large down payment delays homebuying. While you’re saving, home prices in most areas continue to rise, which means you’re chasing a moving target.

FHA can shortcut the process by requiring only 3.5% down for borrowers with credit scores of 580 or higher. Then you start to build equity that can become an asset for the rest of your life. 


Down Payment Assistance Programs (DPA) or Zero Down Payment Programs:
Eligibility subject to program stipulations, qualifying factors, applicable income and debt-to-income (DTI) restrictions, and property limits. Fairway is not affiliated with any government agencies. These materials are not from HUD or FHA and were not approved by HUD or a government agency.

Fairway is not affiliated with any government agencies. These materials are not from HUD or FHA, and were not approved by a government agency.

Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.

Further Reading

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