If you are a home buyer seeking a mortgage, you understand the importance of having a down payment. The amount of this payment can determine whether you get approved for a loan. It also influences the terms of your mortgage, affecting your rate and fees for the life of the loan. Federal Housing Administration programs make it more possible for prospective home buyers to afford down payments.

How Much Should Home Buyers Save for a Down Payment?

In years past, the gold standard down payment amount was 20% of the purchase price. However, the median down payment is now around 12%, according to the National Association of Realtors Research Group.

A double-digit down payment can still be out of reach for some buyers. Fortunately, the FHA insures mortgages that make it possible for buyers to put down a smaller amount and realize their goal of owning a home.


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What Is an FHA Loan?

The FHA insures mortgages requiring lower down payments and minimum credit scores than conventional loans. Its goal is to shield lenders from monetary losses.

The FHA is part of the U.S. Department of Housing and Urban Development. It insures loans on:

  • Single-family properties

  • Multi-family properties

  • Hospitals

  • Residential care facilities

The terms make these government-backed loans popular with first-time home buyers — according to the 2021 FHA Annual Report, almost 85% of first-time home buyers used FHA insurance.

How the FHA Loan Program Works

The Federal Housing Administration does not lend money directly to borrowers. Instead, it guarantees loans so that lenders can offer mortgages to borrowers who don't qualify for conventional loans. The FHA backing protects the lender from almost all risk.

Lenders can offer mortgages only to buyers who meet the minimum FHA qualifications. However, they can and do impose their own standards. If a lender says you do not qualify for a loan, keep searching until you find one with different minimum requirements.

Who the FHA Loan Program Benefits

The FHA program operates under the belief that home ownership benefits the public. It can help those who:

  • Have little money saved for a down payment

  • Have low credit scores

  • Want to purchase a home but do not qualify for a conventional mortgage


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What Is the Minimum FHA Down Payment?

With an FHA loan, its not uncommon for buyers to put 3.5% of the house's purchase price. As with most loans, though, a higher down payment can help you get a lower interest rate.

The down payment percentage required for your loan depends on your credit score. Applicants with a score of 580 or higher can qualify for the 3.5% amount. You may still be eligible for an FHA loan if your credit score falls between 500 and 579. However, the lender may require you to have at least a 10% down payment.

Are There Other Programs With Low Down Payments?

The FHA loan is not your only option for borrowing with a low down payment. Other choices offer lower — and, in some cases, no — down payment. These programs have specific eligibility requirements.

Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac offer 97% loan-to-value financing for home buyers. You may also know these as conventional 97 loans. They are appealing choices for those who cannot meet an FHA loan's 3.5% down payment requirement.

While they require a lower down payment than an FHA loan, conventional 97 loans have other stipulations. The borrower must have a credit score of 620 or higher. Fannie Mae and Freddie Mac also consider other risk factors.

USDA

When you think of mortgage loans, you might not think of the United States Department of Agriculture right away. In fact, borrowers who live in less densely populated areas can qualify for a loan through the USDA. It defines eligible rural areas as those with a population of less than 20,000.

The USDA requires that borrowers earn no more than 15% above the local median income. You must also have a credit score of 640 or higher. If you qualify for the mortgage, you can get financing with no down payment at all.

VA Loans

Mortgages through the Veterans Administration are for borrowers who are veterans or currently serving in the military. Minimum service requirements apply. Spouses of veterans who are missing in action, prisoners of war or deceased may also qualify.

The Veterans Administration does not require a down payment, though some lenders may need one for borrowers using the VA home mortgage guaranty.

What Is Mortgage Insurance?

An FHA loan requires mortgage insurance premiums. MIP protects the lender (not the borrower) if you stop making loan payments. If your down payment is less than 10%, you may need to carry it for the life of your loan.

MIP consists of two parts:

  • FHA Upfront MIP: payable at the time of closing, usually 1.75% of the loan amount

  • FHA Annual MIP: payable each month, usually 0.85% of the existing loan balance per year

Mortgage Insurance Requirements for Other Loan Types

Most conventional loans require private mortgage insurance when the borrower puts down less than 20% of the home's purchase price. You can usually cancel PMI once you have a certain amount of equity in your home.

USDA loans require mortgage insurance, but they may be less than what you need with an FHA loan. VA loans do not require mortgage insurance. Fannie Mae and Freddie Mac loans require it for borrowers with less than a 20% down payment.

What Are Other FHA Loan Requirements?

Other factors determine your FHA loan eligibility.

  • Loan limits: The current nationwide FHA "floor" and "ceiling" limits are $420,680 and $970,800. Use the HUD lookup tool to determine your desired area's mortgage limits.

  • Debt-to-income ratio: Lenders view the percentage of your pre-tax income that goes toward monthly obligations. The guidelines are flexible, though the "acceptable" amount is about 43%.

Gifts and Down Payment Assistance Programs

Options exist for borrowers trying to meet the minimum required down payment.

Gifts

You can accept gift money toward a down payment. If you use a gift, you must abide by the rules:

  • The money cannot be a loan in disguise — it must be a gift.

  • The person who gives you the money needs to write a formal letter for each gift.

  • You need to provide evidence of the money leaving the giver's account and transferring to yours.

Down Payment Assistance

If you research down payment assistance programs, you will discover some in each state. Local areas may also offer assistance. Each has its own set of rules and qualifications. You may have to pay back the money, or you may receive it as a grant. Be sure to also check out our nationwide list of available downpayment assistance grants.

Benefits of an FHA Loan

If you opt for an FHA loan, you can enjoy these benefits:

  • Low down payment

  • Mortgage rate equal to or lower than a conventional loan

  • Options for lower credit scores

  • Streamlined refinancing process

Fortunately, people pursuing homeownership may get a mortgage without waiting until they have saved up the conventional 20% down payment. If you're seeking a loan, it is good to research your options to determine which loan and down payment amount work best for your situation.