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For some first-time home buyers, it can be hard to put together a down payment for a home. Just consider the following:
- Home prices are rising faster than ever before.
- Home prices across the U.S. are rising faster than people’s pay.
- Americans between the ages of 25 – 49 owe trillions of dollars in student loan debt.
Taking all of this into account, it’s easy to understand why it’s harder for today’s potential homeowners to save up for a down payment, especially when compared to previous generations.
But don’t despair. If you’re looking to become a homeowner but you’re having trouble with the down payment, help is available in the form of a Federal Housing Administration (FHA) loan.
How Do FHA Loans Make Homeownership Easier?
An FHA home loan is available to anyone, but it is designed to help first-time home buyers and home buyers with lower credit scores or lower incomes become homeowners.
FHA loans are offered through regular lenders (like banks, credit unions and online lenders) but are backed by the federal government.
Because the federal government promises to cover the loan in case the borrower defaults, lenders can offer these loans to borrowers who might not qualify otherwise. This makes FHA loans more attractive to home buyers for two key reasons.
Easier to qualify
|FHA Loan||Conventional Loan|
|Minimum Credit Score||580 or higher|
500 – 579 with 10% down
|620 or higher|
|Maximum Allowable DTI||57% or lower||50% or lower|
Having greater flexibility with the mortgage requirements makes it easier for more homeowners to qualify.
Lower down payments
Conventional mortgages require homeowners to put at least 3% down and to pay private mortgage insurance (PMI). A 20% down payment on a conventional loan eliminates the need for mortgage insurance. One borrower benefit of FHA loans is that you can pay as little as 3.5% down, making homeownership accessible to many more Americans.
Not having to save for a 20% down payment frees up money that you may need to cover your closing costs, your move or future home renovations.
What Are the Other FHA Loan Requirements?
FHA loans can be a powerful solution, especially if you have a credit score on the lower end of the spectrum and a high DTI. However, they do come with some additional requirements.
Mortgage insurance premiums
Like conventional loans, FHA loans require mortgage insurance. If you can’t make a 20% down payment, you’ll have to pay for mortgage insurance premiums (MIPs). How long you end up paying the MIP depends on the size of your down payment:
- 10% or more down: 11 years
- 10% or less down: The life of the mortgage
Compared to the private mortgage insurance (PMI) you’d be paying on a conventional mortgage, you may find that you’ll pay more in MIPs over the life of the loan.
One other condition of an FHA loan is that there are limits to how much you can borrow. Loan limits vary by region, but with an FHA mortgage loan for a one-unit property, your borrowing limit can range from $420,680 in low-cost areas to $970,800 in high-cost areas.
Another requirement of the FHA loan program is that the home must be appraised by an FHA-approved appraiser.
An FHA appraiser checks out the home to make sure it meets the FHA’s standards for livability and provides an independent assessment of the home’s value. This lets your lender know that the home is worth the amount you want to borrow from them.
Can I Get Help With My Down Payment?
While using an FHA loan to get a lower down payment can be a big help, you may still have trouble saving up for it. The good news is that help is available – and it can come in a surprising number of ways.
For many first-time home buyers, getting a cash gift from family to make a down payment is fairly common.
While conventional loans limit gifts to immediate family, FHA loans are far more flexible. With an FHA loan, you can get down payment gifts from:
- Family members
- Employers or labor unions
- Close friends who have a “clearly defined and documented interest” in the borrower
- Charitable organizations
In each case, you’ll need to provide a “gift letter” or documentation showing where the money came from.
FHA loans can also make it easier for you to receive down payment money in the form of grants. Grants are like college scholarships for home buyers. You get the money for your down payment, and you don’t have to pay it back.
Grants are usually awarded by state and local governmental agencies or public entities, like community organizations and nonprofits.
These agencies and organizations usually incorporate home buyer education programs with homeownership assistance programs for low- to moderate-income families and first-time home buyers.
Technically, these are second mortgages that come with a 0% interest rate. The good news is that lenders will forgive the loan as long as you live in your home for a set period of time. Usually, it’s 5 years. But it can be as long as 15 – 20 years with some lenders.
Deferred-payment loans (at 0% interest)
Like forgivable loans, you don’t need to repay a deferred-payment loan as long as you live in the home. Unlike forgivable loans, you’ll have to pay the loan back if you move, sell or refinance your home.
Low-interest mortgage loan
If you can’t get a gift or forgivable loan, your lender or another organization may offer you a low-interest mortgage loan. The loan, which would cover your down payment, is taken out at the same time as your mortgage loan.
You’ll have to pay back the loan. So, essentially, you’ll have two mortgage payments each month.
Matched savings programs
Matched savings programs work in the same way. Matched savings programs, or individual development accounts (IDAs), are programs that help home buyers get the money they need for a down payment by offering to match what the buyer has saved.
So, if you need $10,000 for a down payment and you put $5,000 into an IDA account, the organization will deposit a matching $5,000 that you can use to cover the difference.
How Can I Find a Down Payment Assistance Program?
If you’re trying to keep track of all the options and programs you need to research to get free (or practically free) money for your down payment, don’t stress. Like the One Ring in “The Lord of the Rings,” these programs want you to find them.
That said, these programs are different, depending on the state or local community. If your research is coming up short, take these steps to find the down payment assistance you’re looking for.
Find your state housing finance agency (HFA)
While there are many resources available to help you with down payment assistance, the best place to start is at your state’s Housing Finance Agency (HFA).
These agencies are state-run organizations that provide homeowner education and connect home buyers from every walk of life to the resources they need to become a homeowner.
Talk to the professionals
Ask your loan officer, mortgage broker or real estate agent about down payment assistance programs. They have access to resources and research that can connect you to options you may not have found so easily on your own.
Also, some down payment assistance programs may only be available for specific properties and geographic areas. If your real estate professional knows this in advance, they can connect you to the FHA and Department of Housing and Urban Development (HUD) programs in your area.
Ask the Chenoa Fund
The Chenoa Fund is a national down payment assistance program that specializes in providing down payment assistance financing under FHA guidelines.
It turns out that the Chenoa Fund provides up to 3.5% down payment assistance. Sound familiar? That’s just enough to qualify for an FHA loan!
Should I Get Down With an FHA Mortgage?
FHA mortgage loans can make it easier for home buyers to become homeowners, regardless of their ability to make a large down payment.
But, as with so many things in life, being prepared counts.
Knowing all the FHA loan requirements and knowing how to access down payment assistance can make the process more affordable.
Federal Reserve System. “Consumer Credit – G.19.” Retrieved October 2021 from https://www.federalreserve.gov/releases/g19/current/default.htm
U.S. Department of Housing and Urban Development. “MAXIMUM MORTGAGE LIMITS 2022.” Retrieved December 2021 from https://www.hud.gov/program_offices/housing/sfh/lender/origination/mortgage_limits