Federal Housing Administration loans help borrowers of modest means buy homes with low down payments. Mortgage insurance premiums and competitive interest rates are some features of the government-backed program. Borrowers pay an annual premium to insure the lender against default. This guarantee allows participating lenders to offer low rates on FHA loans despite a minimal down payment investment. The minimum down payment required for FHA loans is tied to your credit score.
Typical Credit Standards
The FHA has credit requirements that are more flexible than those found in conventional loan guidelines. The FHA sets minimum credit scores, which lenders stick to in order to get the FHA's insurance coverage at closing. FHA lenders can apply more stringent credit guidelines, however, increasing the minimum score a borrower needs to get a loan. For example, many lenders require a minimum score in the low 600s to qualify for an FHA loan, whereas the FHA allows scores in the 500s and applies tiers to determine the minimum down payment investment.
FHA's Minimum Down Payment
You need a score of at least 580 to qualify for the FHA's minimum down payment requirement of 3.5 percent of the purchase price of the home. Conventional financing typically requires between 5 percent and 20 percent as a minimum investment when buying a home. Usually, when a borrower puts down less than 20 percent, a conventional lender requires private mortgage insurance to cover the lender if the borrower defaults. All FHA loans require mortgage insurance coverage regardless of credit and down payment investment.
FHA's Bare Minimum
You can get an FHA loan with a credit score as low as 500 if your lender follows the FHA's official guidelines, but it will cost you a larger down payment. According to the FHA, a borrower with a score between 500 and 579 qualifies if he puts at least 10 percent down. However, lenders that accept borrowers with these scores are scarce. Controversy surrounds the numerous lenders that replace the FHA's flexible credit standards with more strict rules, known as "overlays."
Ways to Reduce Your Minimum Investment
The FHA also allows you to work with government and nonprofit agencies to finance all or a portion of your minimum down payment investment. State-run housing finance agencies throughout the country provide funds to local agencies that finance borrowers who meet low- and moderate-income restrictions. Additionally, you can get a family member or approved charitable organization to donate the down payment to you. Lenders verify that these "gift" funds come from an acceptable source and do not need to be repaid.
- HUD: Handbook 4155.1: Mortgage Credit Analysis for Mortgage Insurance
- American for Financial Reform: NCRC Files Fair Lending Complaints Against FHA Lenders
- National Association of Mortgage Processors: HUD Tightens Guidelines for DPAs, Providing Opportunity and Options for Mortgage Professionals & Homebuyers
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