FHA loans do require a down payment, but it is smaller than conventional loans ask for

An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency. The minimum down payment is 3.5 percent of the home's purchase price. That means on a $200,000 home, you would put down $7,000. On a $300,000 home, you would put down $10,500.

Conventional loans — mortgages not insured by the government — typically require 5 to 20 percent down. So an FHA loan lets you buy a home with less money upfront than most other borrowers. The tradeoff is that you will pay mortgage insurance, a monthly fee that protects the lender if you stop paying.

The 3.5 percent minimum applies to most borrowers. Some programs for first-time homebuyers or people in rural areas may allow lower percentages, but 3.5 percent is the standard floor for FHA loans.

Key Takeaways

  • FHA loans require a minimum down payment of 3.5 percent of the home price, which is lower than conventional loans.
  • You will pay mortgage insurance on top of your regular monthly payment because the down payment is small.
  • The down payment can come from your own savings, a gift from a family member, or a grant program in your area.
  • You must have a credit score of at least 580 to get an FHA loan with the 3.5 percent down payment.

Where the down payment money can come from

The 3.5 percent does not have to be money you earned yourself. You can use a gift from a family member — a parent, grandparent, sibling, or spouse. The lender will ask for a signed letter from the person who gave you the money, stating that it is a gift and does not need to be repaid.

Some cities and nonprofits also run down payment grant programs. These are real money that you do not repay, different from a loan. Your lender or a local housing counselor can tell you whether your area has one. The amount varies widely — some cover $2,000, others cover much more.

You cannot borrow the down payment from another lender or put it on a credit card. The lender will ask where the money came from, and borrowed funds do not count.

What happens after you put down 3.5 percent

Once you close on the home, you will pay mortgage insurance premiums as part of your monthly payment. There are two types: an upfront premium paid at closing (usually rolled into the loan amount), and an annual premium divided into monthly payments.

The upfront premium is 1.75 percent of the loan amount. On a $192,500 loan (the $200,000 home minus your $7,500 down payment), that is about $3,369. Most borrowers add this to the loan rather than pay it in cash at closing.

The monthly insurance payment depends on the loan size, the interest rate, and how long you are borrowing the money. On a $200,000 home with a 3.5 percent down payment, the monthly insurance might be $150 to $250, but this varies by lender and current rates.

How credit score affects your down payment options

Your credit score — a number that shows how reliably you have paid debts in the past — determines whether you can use the 3.5 percent minimum. If your score is 580 or higher, you can put down 3.5 percent. If it is between 500 and 579, most lenders will require 10 percent down instead.

A credit score below 500 makes FHA loans very difficult to get. If your score is low, you may want to spend a few months paying bills on time and paying down credit card balances before you explore. Even a small improvement can lower the down payment you need.

Down payment information programs in your area

Many states, cities, and nonprofits offer down payment help specifically for first-time homebuyers or people with lower incomes. Some are grants (money you keep), others are forgivable loans (you owe them but the debt disappears after you stay in the home for a set time), and some are second mortgages (a separate loan you repay).

The amount, income limits, and rules vary by location. Your mortgage lender can point you toward programs, or you can contact your city or county housing authority. A housing counselor — available free through HUD, the Department of Housing and Urban Development — can search for programs you may be able to use.

The real cost of a smaller down payment

Putting down only 3.5 percent means you borrow more money and pay mortgage insurance. Over the life of a 30-year loan, the insurance adds up. On a $200,000 home, you might pay $40,000 to $60,000 in total insurance costs, depending on rates and how long you keep the loan.

If you can save more than 3.5 percent, putting down 10 or 15 percent reduces the insurance you pay and lowers your monthly payment. But if 3.5 percent is what you have now, an FHA loan still lets you buy a home rather than wait years to save more.

Frequently Asked Questions

Can I use a gift for my down payment if the person is not family?

Most lenders require the gift to come from a family member — parent, grandparent, sibling, or spouse. Gifts from friends, employers, or charities are usually not allowed. Ask your lender before you accept money from anyone outside your family.

What if I do not have 3.5 percent saved right now?

You will need to save it before you can close on a home. Some down payment grant programs can cover part or all of it, so check with your local housing authority or a nonprofit housing counselor. If no grants are available, you may need to delay buying until you have saved the amount.

Does the down payment have to come from a bank account?

The lender will ask to see bank statements showing the money for at least two months before you explore. If you receive a gift, the lender wants to see it in your account for at least two months as well. Cash gifts are harder to document and may not be accepted.

If I put down 3.5 percent, when does the mortgage insurance go away?

With an FHA loan, mortgage insurance stays for the life of the loan if you put down less than 10 percent. If you put down 10 percent or more, the insurance stops after 11 years. You cannot remove it early, even if your home value rises.

Can I borrow money for the down payment from my 401(k)?

Some 401(k) plans allow loans to yourself, which the lender may count as borrowed money you cannot use. Other plans allow withdrawals for first-time homebuyers without the usual penalty. Check with your plan administrator and your lender before you withdraw anything.