Saving up to purchase a home is one of the most important, and difficult, financial moves you will ever make. As you look at various loans you’ll notice they differ in their down payment requirements. Understanding the requirements for a down payment on an FHA Loan will help you decide if it is the right loan for you.
If you are a first-time homebuyer, you can purchase a home with a smaller down payment by taking out a home loan from the Federal Housing Agency (FHA).
What Are FHA Loans?
FHA loans are designed so first-time borrowers with low or medium income and less than ideal credit can buy a home. The government backs FHA loans.
Many people don’t qualify for traditional financing, so the creation of FHA loans helped more Americans become homeowners.
FHA loans have different requirements than conventional mortgages. It’s important to know what to expect when you go to apply for your loan through the Federal Housing Agency.
What is the Down Payment on an FHA Loan?
As of 2020, the minimum down payment on an FHA loan is 3.5% if you have at least a 580 credit score.
If your credit score is between 500 and 579, you will need at least 10% down to qualify for an FHA Loan. You can pay your down payment with savings, gift money, or grant funds for down payment assistance.
Once you have your down payment ready, you can apply for the loan with lenders who offer FHA-insured mortgages.
Other Requirements for an FHA Mortgage
In addition to the down payment, there are several other requirements you must meet to qualify for an FHA loan.
FHA borrowers must also meet income, credit, and employment requirements. Your lender will need to see your tax returns, W-2 forms, bank statements, proofs of identity, and asset account statements to pre-approve you for an FHA loan.
The minimum credit score needed to get an FHA loan is 500. It’s important to note that your interest rate will be higher if your credit score is low.
Should You Pay More Than the Minimum Down Payment on an FHA Loan?
FHA loans have a lot of advantages, but those benefits come with a cost.
When you take out an FHA loan, you will be required to pay a monthly insurance premium (MIP). MIP on FHA loans can cost you hundreds of dollars each month on top of your regular payment.
You can select a 15 or 30-year term to pay off your FHA loan, but you’ll pay less interest on a shorter term.
That money coming out of your pocket won’t be working to pay down your principal or build equity. A larger down payment will reduce the amount of interest you pay over time. Eventually, you should refinance your FHA loan to a conventional loan if your financial situation improves.