FHA loans require a down payment as low as 3.5 percent of the home's purchase price
An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency. The down payment — the money you bring to closing — can be as small as 3.5 percent of what the house costs. On a $200,000 home, that means $7,000 down. On a $300,000 home, that means $10,500 down.
This is lower than conventional loans, which typically require 5 to 20 percent down. The tradeoff is that FHA loans require you to pay mortgage insurance — a monthly fee that protects the lender if you stop paying. That insurance stays on your loan for the life of the loan if you put down less than 10 percent, or for at least 11 years if you put down 10 percent or more.
You do not have to put down exactly 3.5 percent. You can put down more — 5 percent, 10 percent, 15 percent, or any amount up to 100 percent. The more you put down, the lower your monthly mortgage insurance payment will be, and the sooner you can remove it from your loan.
Key Takeaways
- FHA loans allow down payments as low as 3.5 percent of the home price, which is lower than most conventional mortgages.
- You must pay mortgage insurance if you put down less than 10 percent, and that insurance typically stays for the life of the loan.
- Putting down more than 3.5 percent reduces your monthly insurance cost and may let you remove insurance sooner.
- The down payment money can come from your own savings, a gift from a family member, or a grant program in your state or city.
- You will also need to pay closing costs — separate fees for the lender, appraiser, title company, and others — which typically run 2 to 5 percent of the loan amount.
Where the down payment money comes from
The down payment must come from a source you can document. Most commonly, it comes from your own savings account. You will need to show bank statements proving the money has been there for at least two months, so lenders know you did not borrow it.
A family member can also give you the money as a gift. The lender will ask for a signed letter from that person stating it is a gift, not a loan you have to repay. Some lenders require the gift to come from a relative — parent, sibling, grandparent — though rules vary by lender.
Some states and cities run down payment information programs that give grants or low-interest loans to first-time homebuyers. These programs may cover part or all of your 3.5 percent down payment. Your mortgage lender or a local housing counselor can tell you what programs exist in your area.
What happens if you do not have 3.5 percent saved
If you cannot save 3.5 percent on your own, a down payment information program may cover it. These programs exist in most states, though the amount they cover and who they serve varies widely. Some cover the full 3.5 percent; others cover part of it and require you to contribute the rest.
To find programs in your area, contact your city or county housing authority, or call 211 (a free helpline that connects you to local resources). A housing counselor can also search for you. Many nonprofits offer free counseling to people preparing to buy a home, and they know which programs are currently open in your neighborhood.
If no information program covers your down payment, you have two other options: wait and save more money, or look for a co-borrower — someone with stronger finances who will sign the mortgage with you and help you meet the lender's requirements.
Closing costs are separate from the down payment
The down payment is not the only money you need at closing. You will also pay closing costs — fees to the lender, appraiser, title company, and others involved in the sale. These typically run 2 to 5 percent of the loan amount on top of your down payment.
On a $200,000 home with a 3.5 percent down payment, you would bring $7,000 down plus another $4,000 to $10,000 in closing costs — roughly $11,000 to $17,000 total. Some lenders allow you to roll closing costs into the loan instead of paying them upfront, though that increases your monthly payment.
Ask your lender for a Loan Estimate as soon as you are ready to explore. This document lists every closing cost and lets you compare offers from different lenders. You are may have access to to see it within three business days of explore.
How putting down more affects your mortgage insurance
If you put down 3.5 percent, you pay mortgage insurance for the entire life of the loan. This insurance is built into your monthly payment and does not go away when you reach 20 percent equity in the home, as it does with some conventional loans.
If you put down 10 percent or more, mortgage insurance stays on the loan for at least 11 years, then can be removed once you reach 20 percent equity. This means putting down 10 percent instead of 3.5 percent costs you more upfront but saves you money over time by letting you remove insurance sooner.
The monthly insurance payment depends on the loan amount and how much you put down. A larger down payment means a smaller loan, which means lower insurance costs. Your lender can show you the exact monthly payment for different down payment amounts so you can compare.
Minimum credit score and debt requirements
FHA loans do not have a strict minimum credit score set by the government, but most lenders require a score of 580 or higher to approve a 3.5 percent down payment. Some lenders will work with scores as low as 500, though they may require a larger down payment or charge a higher interest rate.
Lenders also look at your debt-to-income ratio — the percentage of your monthly income that goes to debt payments. Most FHA lenders want this ratio to be 50 percent or lower, meaning your total monthly debts (car loans, credit cards, student loans, and the new mortgage) should not exceed half your gross monthly income.
If your credit score is below 580 or your debt ratio is high, you may still be able to get an FHA loan, but you might need to put down more than 3.5 percent or work with a lender that specializes in borrowers with lower credit scores.
Frequently Asked Questions
Can I borrow the down payment from someone?
No. The lender will ask where the down payment came from, and borrowed money does not count. It can come from your own savings, a family gift, or a down payment information program. If you borrow from a family member, the lender will treat it as a debt you owe, which affects your debt-to-income ratio.
What if the house appraises for less than the purchase price?
If the home is worth less than you agreed to pay, the lender will only lend based on the lower appraised value. You will need to cover the difference with your own money or renegotiate the price with the seller. This is why having savings beyond your down payment is important.
Do I have to put down 3.5 percent, or can I put down less?
FHA loans require a minimum of 3.5 percent down. You cannot put down less. You can put down more — 5 percent, 10 percent, or any amount higher — but 3.5 percent is the floor.
Can I use a 401(k) or IRA for the down payment?
You can withdraw from a 401(k) or IRA for a down payment, but it comes with tax penalties and may affect your retirement savings. Talk to a tax professional or financial advisor before doing this. Some lenders also have rules about how recently the money must have been in the account.
Will the down payment amount affect my interest rate?
Yes. A larger down payment typically means a lower interest rate, because the lender is taking on less risk. The difference is usually small — a quarter to half a percent — but it adds up over 30 years. Ask your lender to show you rates for different down payment amounts.