The Federal Housing Administration (FHA) offers loans to first-time home buyers who would otherwise be unable to get a mortgage. Since the Federal government insures the loans, mortgage lenders can offer borrowers more favorable terms due to the reduced risk. Like any other mortgage, you must pay a down payment to receive an FHA loan.
The following are the rules, requirements of an FHA loan and getting assistance:
Minimum Down Payment
You should note that you are required to make a deposit for every FHA loan for which you apply. One of the main benefits of FHA loans is the reduced down payment which can be as low as 3.5%. Considering mortgage lenders traditionally ask for a 20% down payment for a loan, an FHA loan offers a massive reprieve.
The down payment for an FHA loan can be as high as 10%, depending on your credit. The 3.5% minimum down payment is for borrowers with a credit score higher than 580, whereas the 10% minimum down payment is for borrowers with a credit score between 500 and 579.
It is also crucial to note that though the FHA sets the above minimum requirements for their loan program, private mortgage lenders are free to set their own rates, which are often stricter than FHA requirements.
Therefore, it is in your best interest to learn how to calculate your home loan payments in the context of a calculator. You should also ensure you shop around among mortgage lenders to get the best deal possible, as some private lenders will be more lenient than others.
Mortgage Insurance Requirements
FHA loan lenders require borrowers to have mortgage insurance to offset the risk associated with FHA loans. You have to pay the mortgage insurance premium (MIP) if you put up a down payment of less than 20%. The insurance will make the payment in addition to the FHA in case the borrower fails to make payments and defaults on the loan.
There are two types of mortgage insurance premiums for FHA loans. The first is the upfront mortgage insurance premium which is 1.75% of the loan amount. The premium can be paid as part of the closing costs, but most borrowers choose to roll it into their monthly mortgage payments.
The second type of mortgage insurance premium is the annual mortgage insurance premium. The premium will be 0.45% to 1.05% of the loan, depending on the duration of the loan, the loan amount, and the initial loan-to-value ratio (LTV). The insurance premium is divided by 12 and paid monthly.
You are also required to pay mortgage insurance for a conventional loan. However, when you get an FHA loan as a first-time home buyer and make less than a 10% down payment, you have to pay the insurance premiums for the entirety of the loan.
Down Payment Gift Rules
If you are an FHA loan borrower, you can receive money as a gift and contribute it to the total down payment amount. However, the FHA has various rules about where you get the gift. The down payment gift can come from friends, relatives, labor unions, and employers. You can even receive a gift for a down payment from a non-profit organization.
Moreover, you have to receive a formal gift letter from the person or entity giving the gift to ascertain that the gift is indeed a gift and not a loan in disguise.
On the other hand, the FHA restricts receiving a gift for an FHA loan down payment from home builders, home sellers, real estate agents & brokers, or anyone with a vested interest in selling the home.
Down Payment Assistance
The FHA does not offer a proprietary down payment assistance (DPA) program. However, you will find thousands of down payment assistance programs in most states around the country. Most cities and counties also offer their residents down payment assistance programs.
Each down payment assistance program will have its own rules. For example, some programs will only help with closing costs, whereas others will help first-time buyers only. Most FHA loan borrowers will qualify for these down payment assistance programs, but it is essential to understand the terms that come with the assistance, especially as they pertain to FHA rules.
In some cases, you may receive thousands of dollars in grants meaning you have to repay little to nothing for the FHA loan.
Getting an FHA loan is a good idea for first-time buyers who cannot get conventional loans. However, the FHA has rules about these loans, which you should follow or risk losing their assistance or the loan in full. The article above should give you a basic understanding of the FHA down payment rules and requirements, but more research is recommended.
