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FHA Loans: A Low Down Payment Home Buying Option

FHA Loans a low down payment home buying optionFHA loans are one option for home buyers in today's market. In fact it's often a popular route for first time home buyers. One main reason for the desire to go FHA is the low down payment requirement. Home buyers need 3.5% of the purchase price as cash-on-hand for the down payment. This means if you're buying an $80,000 house you'll need less than $3,000 for the down payment. 

The Federal Housing Administration (FHA) doesn't actually issue the mortgage loan. Instead, it provides mortgage insurance to protect lenders from defaults (which become foreclosures). This is why FHA loans come with mortgage insurance attached to them.

Now, you'll need to keep in mind that you need to fund the escrow account - home owners insurance and property taxes - at the closing table to you'll need more than the down payment. Closing costs can also include some fees as well. But the down payment is what really adds up at the closing table. Imagine if you went conventional instead of FHA and you needed 10% down. That would be $8,000 instead of $2,800 with the FHA loan. Plus the seller can contribute up to 6% of the sale price to help cover closing costs. Gift funds are also allowed to cover closing costs.

What is an escrow account? Watch the short video below.

Another bonus to FHA loans is their debt-to-income ratios. Generally the rule for FHA is that your house payment should not exceed 31% of your income. Adding your house payment to the rest of your debt should keep your total debt at or below 43% of your income. Higher ratios may be considered with compensating factors. FHA has no income limit and no geographic restrictions. You can also have non-traditional credit – great for self-employed borrowers.

So when it comes to comparing conventional vs FHA loans (or FHA vs any other mortgage loan option) you may want to consider down payments, DTI and other factors. You can also finance repairs needed to make the house FHA-approved with the home improvement loan FHA 203k. This option allows you to roll remodeling costs directly into the mortgage. Learn more at our FHA 203k page.

Want to know more home buying options? Download "The Only Mortgage Loan Options Guide You Need" at the button below. Our free eBook will help you explore your buying options so you can get on track to getting into the home of your dreams.

Download: Mortgage Loan Options Guide

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