How to pay for FHA down payment and closing costs

Peter Miller
The Mortgage Reports contributor

FHA: The mortgage program first-time buyers love

FHA is one of today’s most popular home buying programs.

The FHA down payment is just 3.5% for most borrowers. As down payments go it’s certainly a lot less than the 20% up front some mortgage programs require.

But is there a way to make the FHA down payment even easier?

Glad you asked.

Yes, there are more options than simply saving up money each month until you have enough.

Verify your FHA cash out refinance eligibility. (Jul 11th, 2020)

How the FHA down payment works

In basic terms most FHA borrowers will pay a 3.5% down payment. For a $200,000 property, this means the buyer will put up $7,000 while the lender will provide $193,000 in financing.

The cash requirements to buy a home include more than the down payment. Purchasers can also need cash for such things as closing costs, moving expenses, repairs, and reserves. Your total costs will depend on such factors as where the property is located, how far you’re moving and what repairs are required. Local market conditions can also be important. In some markets, you may be able to get the seller to cover certain costs.

The big question is whether buyers can reduce down payment and other expenses. The answer, in many cases, is yes. Here’s how.


Some borrowers may be lucky enough to get some or all of our down payment money through a gift. This really does happen. According to the 2018 Profile Of Home Buyers And Sellers from the National Association of Realtors (NAR), 24% of all borrowers get help from a relative or friend.

FHA rules say that borrowers can get gift money from a variety of sources:

  • A family member
  • A government agency
  • An employer
  • A labor union
  • A “close friend with a clearly defined and documented interest in the borrower”

Under the FHA’s rules, lenders are not allowed to just accept any money. There must be a gift letter which plainly shows that the funds are a gift and not a secret loan.

  • The lender must obtain a gift letter signed and dated by the donor and borrower
  • The letter must show the donor’s name, address and telephone number as well as the donor’s relationship to the borrower
  • The dollar amount of the gift must be stated
  • There must be a clear statement that no repayment is required

In addition, the lender is likely to ask the donors for such things as bank statements to show the source of the money. Be sure to explain to donors that the lender is merely complying with FHA requirements.

Seller contributions

FHA rules prohibit down-payment gifts from sellers. However, sellers can still help buyers with the purchase. FHA guidelines permit seller contributions equal to as much as 6% of the sale price.

“The seller’s maximum contribution to the home buyer’s actual closing, prepaid expenses, discount points, and other financing concessions remains at 6 percent of the sales price,” according to HUD. “Seller contributions in excess of 6 percent will continue to require a dollar-for-dollar reduction to the mortgage.”

HUD is saying you can negotiate with the seller. If the seller wants $200,000 for the property you might come back and say, “I’ll pay the $200,000 if you’ll pay the first $4,000 in closing costs and $2,000 for points to lower my mortgage rate.”

What you cannot do is use seller concession money to pay some or all of the down payment. That money has to come from you or a gift donor.

Will sellers really make sale concessions? Probably not in a strong market with lots of demand and rising prices. In a slower market, or in a market with falling prices, property owners may be very willing to make “contributions” to sell the property at a given price or to simple close the transaction.

The real problem with the FHA down payment

The truth is that the FHA down payment requirement is not a big problem. By historic standards, the FHA down payment is far smaller than a lot of competing mortgage options. There’s a reason why more than 640,000 first-time borrowers used the FHA program in FY 2018.

The real issue is that in a changing economy with lots of consumer debt it’s hard to save.

“Of buyers who said saving for a down payment was difficult,” explains NAR. “Fifty percent of buyers reported that student loans made saving for a down payment difficult. Thirty-seven percent cited credit card debt, and 35% cited car loans as also making saving for a down payment hard.”

The way to win the FHA down payment challenge is to budget, pay bills in full and on time and save – NAR says that 58% of all buyers paid for their down payment by saving. This approach will help you accumulate money and bulk-up your credit score. And if you happen to get some help with gifts and seller concessions, so much the better.

Get an FHA loan quote

Ready to think about buying a home? Get an FHA loan quote, which comes with an eligibility check.

See if you can become a homeowner sooner than you thought possible.

Verify your FHA home purchase eligibility. (Jul 11th, 2020)