Does an FHA mortgage have a maximum down payment?
The FHA does not apply a maximum down payment which means your down payment could be 20%, 50% or whatever amount you want as long as you meet the minimum down payment requirement. The FHA mortgage program requires you to make a down payment of at least 3.5% of the property purchase price if your credit score is 580 and above. You can qualify for an FHA loan with a credit score as low as 500 but you are required to make a down payment of at least 10%.
Review our FHA Mortgage Guide
Your down payment can come from personal funds, such as your bank account, a gift, an employer assistance program or a down payment assistance program. You cannot use a loan for your down payment funds unless it is a qualified subordinated second mortgage. Both down payment assistance grants and qualified subordinated second loans are typically provided by HUD-approved state and local housing departments or commissions.
Review How Down Payment Assistance Programs Work
You can also use funds from your retirement account to pay for your down payment but this is more complicated so we recommend that you consult a tax advisor before you withdraw any funds.
When you apply for an FHA loan, the lender verifies the source of the funds used for your down payment. If you are using money from a bank account it is recommended that the funds are deposited in your account, which is also called “seasoned”, for at least three months before you apply.
Most people who apply for an FHA mortgage have limited funds for a down payment or a lower credit score. If you can make a larger down payment you may want to consider a conventional mortgage so you can avoid paying the upfront and ongoing mortgage insurance premium (MIP) required by an FHA mortgage.
The upfront FHA MIP is usually 1.75% of your mortgage amount and the ongoing monthly MIP ranges from .45% to 1.05% of your loan amount, depending on your mortgage length and loan-to-value (LTV) ratio, which is your loan amount divided by the fair market value of your property. The higher your loan amount and LTV ratio, the higher the upfront and ongoing FHA MIP fees.
FHA mortgage rates tend to be lower than conventional mortgage rates but the lower rate may not fully offset the monthly MIP fee. Additionally, the upfront MIP cost can run thousands of dollars which is a significant extra closing cost you may not have budgeted for.
Additionally, FHA MIP is non-cancellable which means you cannot request to have it removed. If your LTV ratio when your loan closes is greater than 90%, you are required to pay the MIP for your entire mortgage term. If your LTV ratio is less than or equal to 90% at closing, you are required to pay FHA MIP for eleven years.
FHA MIP are extra costs that you may not be required to pay with a different mortgage program, if you can afford a large enough down payment. For example, you are not required to pay private mortgage insurance (PMI) for a conventional mortgage as long as your LTV ratio is 80% or less, which means you make a down payment of at least 20%.
This is why applicants who can make a higher down payment (at least 5%) usually choose a conventional mortgage, unless they have a lower credit score.
The table below compares loan terms conventional and FHA mortgages. As you can see, FHA mortgage rates are lower than conventional loan rates but the FHA closing costs are significantly higher because they include the upfront MIP fee. We recommend that you compare quotes from multiple lenders to find the loan program that is right for you. Shopping multiple lenders is also the best way to save money on your mortgage.
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Sources
"Buying a Home." Federal Housing Administration. U.S. Department of Housing and Urban Development, 2020. Web.
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