When you’re purchasing a new home, figuring out how to tackle a big down payment might leave you scratching your head, especially if you’re a first-time homebuyer. Even if you have a great credit score and healthy debt-to-income ratio, producing a lump sum for the initial investment on a new home can be a challenge.
That’s where the Federal Housing Administration can help. The agency offers home loans with an FHA minimum down payment of 3.5% for qualified candidates. Here’s what you need to know.
3.5% down payment requirements
With a FICO credit score of 580 or above, you can qualify for an FHA home loan with a 3.5% down payment. This is a modest amount compared to conventional home loan down payment requirements, which can range anywhere from 5% to 20%. An FHA loan can help you lock in a mortgage for 96.5% of your home’s value.
In addition to your credit score, here are some other things lenders will look for in your personal financial history:
- A debt-to-income ratio of less than 43%
- Reliable current employment
- Solid employment history with two years of continuous employment and no unexplained gaps in job history
- Good rental history and timely rent payments to previous landlords.
If your credit score falls between 500 and 579, you may still qualify for an FHA home loan; however, your lender will likely require 10% down instead of 3.5%.
Planning for your down payment
Your total down payment will depend on the appraised value or the sales price of the property you’re purchasing. Your lender will determine the required amount based on the lesser of these two figures.
For instance, if your new home’s sales price is $325,000 but its appraised value is $350,000, your down payment would be 3.5% of $325,000. This would give you a down payment of $11,375. Don’t forget to factor in additional closing costs and other fees as well as your upfront mortgage insurance payment of 1.75% of your loan amount with ongoing, annual installments.
Down payment assistance
While the FHA doesn’t provide assistance with down payments, closing costs, and other fees, there are resources available for those things, too. Keep in mind the FHA must approve and properly document your sources for these funds. Here are a few options:
- Savings bonds, stocks, or IRAs
- Sale of personal property
- Collateralized loans
- Employer guarantee or assistance plans
- Monetary gifts from friends, family members, employers, or charitable organizations with no expected repayment. Also, these sources can’t have any interest in the sale of the property.
If you’re planning to purchase a home in the future, start saving for that down payment today. You can also reach out to our OVM Financial experts to help you plan your home purchase. Give us a call, or start your application online. And while you’re at it, read up on FHA loan requirements, FHA minimum credit scores, or FHA occupancy requirements.