Down Payment And Closing Costs: How Much Do You Need With FHA?
One of the reason FHA home loans are so popular is their low down payment requirement. As long as your credit score exceeds 579, you are eligible for 96.5 percent financing, with a 3.5 percent down payment. How much will your down payment and closing costs be?
This post will help you determine that amount, and help you minimize it.
FHA Down Payment: Higher Is Better For Bad Credit
If your credit score is 580 or higher, your minimum down payment for FHA financing is 3.5 percent. If your FICO is between 500 and 579, you are eligible for financing with ten percent down.
Keep in mind that being eligible for financing is not the same as being approved for financing. You can apply, but very few people with the minimum scores get approved for FHA home loans. So if your credit score is marginal, consider coming in with a higher-than-required down payment.
Down Payment Gifts
With FHA homes loans, you can get your entire down payment as a gift from friends or family. Your employer, church or other approved organization may also gift you down payment funds.
Gift funds must come with no expectation of repayment. The loan applicant must show that the giver intends the funds to be a gift, that the giver has the money to give, that the money has been transferred to the applicant, and that the funds did not come from an unapproved source.
If you’re lucky enough to be getting a gifted down payment, you’ll need to do the following:
- Get a signed “gift letter” from the giver, indicating the amount of the gift, and that it is a gift with no expectation of repayment.
- Document the transfer of funds into your account — a deposit receipt or account statement is good.
- Get a copy of the most recent statement from the giver’s account, showing that there was money to give you.
The reason for all this documentation is making sure that the gift does not come from the seller, real estate agent, or anyone else who would benefit from your home purchase.
Down Payment Loans
Can you borrow your down payment for FHA loan? Kind of. Sort of. You can only borrow funds from approved sources, and these mainly comprise down payment assistance programs through various charities and agencies.
However, the programs are worth checking into. Many provide low- to-no-interest loans for your down payment and closing costs, up to five percent of your purchase price.
One way to finesse the borrowed down payment question is to season borrowed funds.
The idea is that when you borrow money and put in into your account, it’s pretty hard to tell which money in there was already yours, and which are the borrowed funds. After a couple of months, it’s all mixed up.
If you took out a personal loan a couple of months ago, and put the money into your checking account, you’d disclose the loan on your application under debts. And the money is just your money, sitting in your checking account.
Note that the two monthly statements you provide with your loan application should be from the time after the deposit of the borrowed funds. Large deposits on a bank statement always trigger extra inquiries from underwriters.
Help From Sellers
As noted above, you can’t get a down payment gift or loan from the home seller, or anyone else who might benefit from the transaction. However, you can get help with your closing costs from a motivated seller.
FHA loans allow sellers to cover closing costs up to six percent of your purchase price. That can mean lender fees, property taxes, homeowners insurance, escrow fees, and title insurance.
Naturally, this kind of help from sellers is not really free. If you want six percent of the sales price in concessions, you’ll have to pay six percent more than the price the buyer is willing to accept.
That’s okay, as long as the property will appraise at the higher price.
FHA Closing Costs
Closing costs for FHA loans are about the same as they are for conventional loans, with a couple exceptions.
- The FHA home appraisal is a little more complicated than the standard appraisal, and it often costs about $50 more.
- FHA requires an upfront mortgage insurance premium (MIP) of 1.75 percent of your loan amount. However, most borrowers wrap that charge into their loan amount.
If you wrap your FHA insurance into your loan amount, your mortgage starting balance looks like this:
- $200,000 purchase with 3.5% down = $193,000 loan with $7,000 down
- Add 1.75 percent of $193,000 = $3,378
- Total loan amount: $196,378
Note that you can wrap the FHA MIP into your new loan amount, but not your other closing costs. When you refinance, if you have enough equity, you can wrap all your costs into the new loan.
Help From Your Lender
If your seller isn’t interested in covering your closing costs, your lender might be. Here’s how that works.
There are many ways to price a mortgage. For instance, here’s what you might see on a rate sheet for a 30-year fixed mortgage:
The rates with negative numbers have what’s called rebate pricing. That’s money that can be rebated to the borrower and used for things like closing costs.
So if you have a $100,000 loan with a three percent rebate (the 4.125 percent rate in the chart above), you get $3,000 from the lender to cover your closing costs.
How can lenders do this? They do it by offering you a higher interest rate in exchange for an upfront payment now. So, you’d get 3.75 percent if you paid the normal closing costs, while 4.125 percent would get you a three percent rebate. If you only keep your loan for a few years, you can come out ahead with rebate pricing.
What Are Today’s Mortgage Rates?
Today’s mortgage rates are unexpectedly low, with well-qualified candidates getting rates well under four percent. FHA mortgage rates can have higher APRs (annual percentage rates) because it includes your mortgage insurance.
To get the best FHA mortgage rate, you’ll want to compare offers from several lenders, and choose the best one. That’s a proven strategy for saving money on your mortgage.