FHA Loan Down Payments
The purpose of an FHA loan is to encourage those who have a low credit card score and low savings to buy a home for the first time. This mortgage loan is insured by the Federal Housing Administration and its down payment is 3.5%.
What is the minimum FHA loan down payment?
The minimum downpayment is usually determined based on your credit card score. If you have a credit card score of 580 or higher, you need a minimum down payment of 3.5%. However, if the credit card score is 500 to 579, then 10% is required for down payment.
The reason borrowers choose FHA loans is because they require low credit card scores and downpayments. Therefore, borrowers who have low credit card scores or have credit card problems can easily qualify for FHA loans.
FHA loans are generally suitable for those who are looking to purchase a home for the first time but do not have sufficient credit score or savings. You can borrow from lenders who are approved by the FHA. However, the interest rate may be beyond the reach of some borrowers.
Mortgage insurance requirements
One of the downsides of FHA loans is that the borrower has to pay the mortgage insurance premium, as the downpayment is less than 20%. The reason for paying this insurance is that since the borrower pays a much lower downpayment, the lender has to take a much higher risk. If the borrower fails or defaults on the loan, the insurance approved by the FHA provides compensation to the lender.
FHA loan offers two types of MIP:
Upfront MIP: The loan amount is 1.75 percent. The borrower has to repay it after getting the loan.
The loan amount ranged from 0.45% to 1.05%. The term of the loan is 15 years to 30 years. The loan amount and the initial loan-to-value ratio need to be done. You have to pay monthly. In addition, the monthly payment has to be calculated by dividing the premium by 12.
If the borrower borrows $120,000 to buy a home, he will have to pay $2,625 in advance for the mortgage insurance premium. Its annual mortgage insurance premium will be $675 to $1,575.
Under the terms of the FHA loan, those who make a downpayment of less than 10 percent must pay in advance. However, if you are no longer affiliated with the FHA or have sold the home, you no longer have to make this payment.
Downpayment rules and gifts
Borrowers who apply for FHA loan can get gift of down payment. This gift can be a financial aid. However, there are some rules in down payment that the borrower must consider.
According to the HUD, these gifts usually come from family members, friends or workers’ organizations. There are also many non-profit organizations that pay for down payments.
However, some groups are not approved for downpayment and they are:
- Home builder
- Brokers or real estate agents
- Individuals interested in home sales
Many countries provide down payment assistance program to borrowers to encourage those who want to buy a house with low income. These programs are suitable for borrowers who take loans from FHA.
Other low-down payment mortgages
In addition to FHA, there are many other options that offer low down payments and there are even many companies that do not take any down payments.
Fannie Mae and Freddie Mac: This conventional loan offers very low down payment and it is 3%.
USDA Loans: In the United States, there are no down payments for borrowers in agricultural areas.
Native American Direct Loan: These loans are eligible for Native American Veterans and their families and in most cases have no downpayment.
The Bottom Line
FHA loans are very popular, especially for those who are interested in buying a new home, as they require a low downpayment and a low credit score. It is important to consider that there is a mortgage insurance premium on the life of the loan, which has to be paid in advance to the borrower.