Orlando Times October 2018
 
Lexi Zarlengo
(407) 292-5400
Four Things to Know about the Down Payment on an FHA Insured Loan
Photo: © Ridofranz - iStockphoto

While most conventional mortgages require an average 20 percent down, homeowners can secure a Federal Housing Administration (FHA) insured loan with as little as 3.5 percent down. Before you rush to apply, though, there’s a catch. All FHA borrowers have to pay mortgage protection insurance, which can ramp up the overall cost of the loan.

1. Most FHA Loans Need Only 3.5 Percent Down. The minimum down payment for an FHA-insured loan is only 3.5 percent. This makes it a good alternative for borrowers who cannot afford the 5–20 percent down payment required by most conventional loans. You don't need stellar credit to apply either. Borrowers with bankruptcies or foreclosures on their credit report may also be able to qualify for an FHA loan.

2. The Down Payment Is Higher for Borrowers with Credit Problems. While the FHA typically has more lenient criteria than conventional lenders, they do have minimum credit standards. Borrowers with a credit score of 580 or less must put down 10 percent in cash to qualify for a loan. Bear in mind, however, that the FHA does not issue mortgages. It merely insures them and pays the originating lender's losses in the event that you default on your loan. The individual lender, not the FHA, decides whether a borrower qualifies for the most competitive loan terms—which means the FHA minimum down payment is not a guarantee that a particular lender will offer you that deal. Some FHA lenders insist on a credit score of at least 640 before they will accept the minimum 3.5 percent down.

3. The Catch Is Mortgage Insurance. Borrowers themselves fund the FHA through two types of mortgage insurance. Upfront mortgage insurance is a one-time payment equal to 1.75 percent of the home loan. This is usually rolled into the loan at closing. Borrowers also pay a monthly premium figured into their mortgage payment. The amount you pay depends on the size and length of the loan and the size of the down payment.

4. Financing the Down Payment. According to FHA rules, the down payment must come from the borrower's own money. In other words, you cannot take out a second loan or ask the seller to finance the down payment. You may, however, accept gift funds from other sources, such as a relative, friend, employer, governmental agency, or charitable organization. The only requirement is that the money is a genuine gift—you must not structure the payment as a loan, and you must not be under any obligation to pay the money back. As an extra concession, the seller can give you a helping hand by picking up some of the closing costs, such as broker fees and title services. You are permitted to accept seller concessions up to 6 percent of the purchase price of the home.

The bottom line is there is no one size fits all with FHA loans. Some borrowers will qualify for the minimum 3.5 percent down; others will not. Mortgage insurance and seller concessions will also affect the total cost of the loan. As always, you should shop around with various lenders, both conventional and FHA, to find the best deal for you.

Lexi Zarlengo  -  (407) 292-5400 Orlando Times  -  October 2018 

Lexi Zarlengo, Keller Williams Realty, 5979 Vineland Rd. #101 , Orlando FL 32819
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