An FHA loan is a government-backed loan insured by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development (HUD).
FHA loan down payment requirements, as well as other eligibility criteria, tend to be more lenient than non-government-backed home loans like conventional loans. This is because these loans were designed to help people — especially those with limited income or subprime credit — buy property.
If you’re looking for home financing and considering taking out an FHA loan, here’s what you need to know.
- What are the down payment requirements for an FHA loan?
- Why a down payment is important
- Saving for an FHA loan down payment
- FHA loan limits
- How to get an FHA loan
- Other FHA loan costs
- FAQ
What are the down payment requirements for an FHA loan?
Since FHA loans are insured by the Federal Housing Administration, you’ll need to meet specific requirements to qualify. This includes credit score, down payment, and debt-to-income ratio (DTI) requirements.
When it comes to FHA loan down payment requirements, the exact amount depends on your credit score. If you have a credit score of 580 or higher, you could qualify for a minimum down payment of 3.5%. This is because these government-backed loans let lenders finance up to 96.5% of the home’s appraised value.
You might still qualify for an FHA loan if your credit score is between 500 and 579. However, you will need to put down at least 10%.
Debt-to-income ratio
Your DTI is the percentage of your monthly income — before taxes — that goes toward your monthly debts. In other words, it’s how much you spend each month on your mortgage, car, and other debts versus how much you earn.
To calculate your DTI, simply add up all of your monthly debts. Then, divide that number by your gross monthly income. Say, for example, you earn $4,000 a month before taxes and spend $3,000 on all debts. Your DTI is 75%.
The reason why your DTI is important is that it shows mortgage lenders how likely you are to be able to handle a mortgage loan. It also gives them a clearer idea of your overall financial health. The lower your DTI, the better.
Lenders offering FHA loans typically consider the following two types of DTI:
- Front-end or housing ratio: This is the percentage of your income that goes toward housing expenses like homeowners insurance and mortgage or rent payments. Your front-end DTI ratio should be no greater than 31%.
- Back-end ratio: This includes all monthly debt payments, not only housing-related expenses. Most lenders focus on this as it offers a more comprehensive overview of your financial situation. Your back-end DTI should not exceed 43%.
You may still qualify for an FHA mortgage loan with a higher DTI if you meet certain compensating factors. These include:
- Having a significant source of nontaxable income
- Making a down payment of 10% or higher
- Providing proof that the loan will not majorly impact your total housing expenses
- Having a significant amount of cash reserves or savings
- Having the potential for increased earnings
Why a down payment is important
A down payment is a percentage of money you pay upfront in order to get a home loan and is based on the property’s purchase price.
Down payments for an FHA loan range from 3.5% to 10%. To qualify for the lowest down payment option, you’ll need a credit score of at least 580.
While you could still qualify for a loan with a smaller down payment, it’s generally better to save up and put down more money. Having a larger down payment shows lenders you’re capable of managing your finances. It also lowers your total loan amount, which can save you money on interest. You might even get better rates, depending on your down payment amount.
Here’s an example of what a $350,000 FHA loan might look like with three different down payments:
| Down payment | Total loan amount | Interest rate | Repayment term | Monthly payment amount | Total interest charges | Total loan cost |
|---|---|---|---|---|---|---|
| 3.5% ($12,250) | $337,750 | 7.250% | 30-year fixed | $2,304 | $491,708 | $829,458 |
| 10% ($35,000) | $315,000 | 7.250% | 30-year fixed | $2,149 | $458,588 | $773,587 |
| 15% ($52,500) | $297,500 | 7.250% | 30-year fixed | $2,029 | $433,111 | $730,610 |
Saving for an FHA loan down payment
While it’s possible to get an FHA loan with only 3.5% down, it’s generally better to save up as much as you can before applying. That way, you can improve your approval odds and potentially get better terms or rates.
The amount you should save depends on your financial situation and goals. In some cases, a lender might also have higher FHA loan down payment requirements.
Here are some ways to start saving up for a down payment:
- Set aside money in a separate account: By keeping your down payment in a separate account, you’ll be less tempted to use it for other purchases.
- Use a high-yield savings account: These dedicated accounts typically have a higher yield than standard savings accounts.
- Review your budget: Look over your budget and cut back where you can to save more money.
- Pay down high-interest debts: High-interest debts — like credit cards — can cut into your savings, so try to pay off some of that debt.
- Take on a side job: Getting a side gig or second job can boost your income significantly, making it easier to save or pay down other debts.
- Create a long-term plan: Ask yourself how much you want to save for a down payment and when you want to buy a house. Then, make a financial plan based on those goals. To make things easier, write down your monthly savings goals so you know exactly what you’re striving for.
Down payment assistance
Saving up for an FHA loan down payment takes time. Depending on your financial situation, it can also be difficult to do. If you’re having trouble saving money, a homebuying assistance program — or down payment assistance program — could help.
Down payment assistance programs come in many forms, including loans and grants. Most are geared toward first-time homebuyers, though you may still be eligible if you’ve owned property in the past.
Here are two homebuying assistance programs:
- HomeFirst Down Payment Assistance Program: Available for New York City residents, the HomeFirst program provides eligible borrowers with up to $100,000 in down payment and closing cost assistance.
- Colorado Housing and Finance Authority (CHFA) down payment assistance: The CHFA offers down payment assistance grants and help with closing costs. This grant can cover up to 3% of your first mortgage costs. It does not require repayment.
The United States Department of Housing and Urban Development has a homebuying program directory you can use to find other programs in your state. Alternatively, visit the Down Payment Resource website for more down payment assistance programs.
FHA loan limits
FHA loan limits vary based on the county and number of available housing units in your area. In 2023, the FHA mortgage limit for a one-unit property is $472,030 in a low-cost area. It’s $1,089,300 in more expensive areas.
Check the FHA loan limits in your area using this online HUD tool.
How to get an FHA loan
To get an FHA mortgage, start by reviewing your credit score and income. This can help you decide what you might qualify for and how much you can afford. It can also help you determine whether an FHA loan is right for you.
Next, compare several lenders. Every lender has its own requirements, rates, terms, loan limits, and fees. Review your options carefully to ensure you choose the best one.
After choosing a lender, you’ll need to complete an application. You may be asked to provide certain information, such as:
- Contact information
- Social Security number
- State ID and/or driver’s license
- Proof of income and/or employment
- Property address
You may also need to provide supporting documentation verifying this information. Commonly requested documentation includes:
- Two recent federal tax returns
- Bank statements
- Recent pay stubs
- W-2 forms
- Proof of identity
- Proof of liabilities and other assets
- Sales contract
When you submit your loan application, the lender will perform a hard credit check so they can pull your credit history. They will also require a property appraisal to ensure the home meets the FHA property requirements.
Once everything is approved, you’ll receive a loan agreement. Review and sign it, then proceed to closing. At that point, you’ll typically need to pay the down payment and any closing fees.
Other FHA loan costs
Like any mortgage, FHA loans come with various fees. Here are the most common ones:
- Closing costs: Common closing costs can include tax service provider fees, government taxes, appraisal fees, property taxes, and homeowners insurance.
- Lender fees: Certain lenders have their own fees, such as one-time administrative or underwriting fees. They may also charge an origination fee, which is a percentage based on the loan amount.
- Mortgage insurance premium (MIP): This is the FHA’s equivalent of private mortgage insurance. It usually entails an upfront premium payment of 1.75% and an annual payment. The current annual premium is 0.85% but will be reduced to 0.55% for eligible mortgages.
FAQ
Are there other low-down-payment or no-down-payment options available?
If you’re looking for a low-down-payment or no-down-payment mortgage, a VA loan or a USDA loan could make sense. VA loans are available to military personnel, veterans, and eligible spouses and have no minimum down payment requirement. USDA loans also come with no down payment requirement, but you may need to purchase property in a rural area.
What are FHA loan interest rates?
FHA mortgage rates vary on a near-daily basis depending on current market conditions. Other factors, like the Federal Reserve and inflation, can also affect the current rates. Certain lenders will post the latest rates on their websites, so you can check there to get up-to-date information.
Can you get an FHA loan with bad credit?
A FICO score of 580 and below is considered below-average credit. You can get an FHA loan with a 500 credit score and a 10% down payment.