FHA is flexible about down payments
One of the big barriers to buying a house for many is the downpayment. Here’s some good news: you may not need one.
There are many ways to avoid making a downpayment. Home buyers are enjoying the popular USDA home loan and VA mortgage program, neither of which require any money down.
But a feature of the Federal Housing Administration (FHA) mortgage can turn this low-downpayment loan into a zero-down program as well.
Homebuyers can get the required downpayment amount from a number of sources — besides their own bank account.
How do FHA mortgages work?
The “traditional” approach to buying a home is to save 20 percent of the house price and use that amount as the downpayment. With an FHA mortgage — actually a mortgage insured by the FHA and issued by a private lender — you can pay as little as 3.5%.
The normal FHA mortgage program is called the 203(b) mortgage, which can be used for a new or existing one- to four-family home. There is also a 203(k) mortgage meant for homes that need significant repair. Under the 203(k), the home buyer can finance up to $35,000 for necessary repairs.
Home buyers with a credit score of just 580 are eligible for the minimum downpayment of 3.5%. Scores from 500 to 579 require 10% down, although few if any lenders approve FHA loans for applicants with sub-580 scores.
The was created in 1934 and mandated to promote homeownership among individuals to whom lenders would not otherwise issue a mortgage approval.
Lenient credit score requirements are one way FHA is helping home buyers. Another is an optional zero-down add-on feature that further reduces buying barriers.
Getting an FHA loan without a down payment
Most home buyers who use FHA come up with at least 3.5 percent down from their own funds.
However, the FHA program allows you to obtain the downpayment through a gift. The gift can come from any of the following sources.
- Your relative
- A fiancé or fiancée
- Your employer or labor union
- A close friend with a “clearly defined and documented interest in the borrower”
- A charitable organization
You may also get a downpayment gift from a government agency or public entity that provides homeownership assistance to first-time and low- or moderate-income buyers.
You may not get the gift from the seller, a real estate agent or broker, the home’s builder, or an associated entity.
These are known as interested parties. In other words, they are individuals or groups that can profit from the home sale.
If any interested party is the source of the gift, the money is considered an inducement to purchase and gets subtracted from the sales price when calculating the downpayment.
Terms of the gift
The gift cannot be made based on a promise of paying it back in the future.
The home buyer will obtain a gift letter from the gifting individual or organization.
The letter will state that no repayment is expected and will provide information about the giftor such as phone number, address, and the account from which the gift funds will be transferred.
Most lenders will require a bank statement from the giftor showing the funds coming out of their account. They will also want to see the full amount deposited into your account.
Make sure your gift donor is comfortable including their bank statement with the gift letter, and that the transfer amount matches the gift letter and the deposit into your account.
The process of documenting a gift is typically straightforward. The small additional time investment is well worth getting into a home without needing your own funds for downpayment.
Check all your assistance options
Even if you don’t have family or friends who can or would make such a gift, there are other possibilities. HUD has a list of available government programs broken out by state, including ones that may offer downpayment and closing cost assistance for homebuyers.
Also check to see if your state and employer offer a program called employer assisted housing (EAH). Low- and moderate-income workers can get loans to cover a downpayment and closing costs. Look for the term “EAH” and your state in an online search engine to see what might be available.
Downpayment assistance is available for 87 percent of U.S. homes according to a recent study by housing data website RealtyTrac. Chances are there is an assistance program in the location where you are looking for a home.
What are today’s rates?
Mortgage rates for FHA loans are low, and FHA does not require higher rates when you use a downpayment gift.
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