FHA Down Payment Assistance - 2011 Update

By Brandon Cornett
© 2011 All rights reserved

FHA loans have become extremely popular among home buyers. They are especially popular among first-time buyers who don't have a lot of money saved for a down payment. In fact, a survey we conducted in 2010 showed that this was the number-one attraction for FHA home loans.

In a nutshell: You will have to make a down payment of at least 3.5% when using an FHA loan to buy a house. If your credit score is below 580, you'll have to put at least 10% down on the loan. This money can be gifted from family members, as long as they don't expect reimbursement. The gift giver will have to write a letter to this effect. Sellers are prohibited from making contributions to the buyer's down payment, if an FHA loan is being used.

2011 Update: The lending industry has changed in many ways over the last few years. We have seen certain mortgage options disappear, new regulations put in place, and various changes made to the FHA program. This creates confusion among home buyers. This article was updated in April 2011 to ensure accuracy. In this article, we will talk about the down payment aspects of the FHA program.

Definition of an FHA Loan

FHA stands for the Federal Housing Administration. This agency falls under the Department of Housing and Urban Development, commonly known as HUD. So the FHA is managed by the federal government.

This organization insures mortgage loans made by lenders in the private sector. They ensure the loan against losses resulting from a borrower's inability to make payments. In other words, if the homeowner defaults on the mortgage loan, the FHA steps in to insure the lender for losses.

Down Payment Requirements

Down payments for an FHA loan range from 3.5% to 10%. These are the minimum requirements. You can put more money down if you want. But the absolute minimum is 3.5%. This is lower in the average down payment for a conventional mortgage loan (one that is not insured by the government).

As mentioned earlier, this is the primary draw of the FHA loan program. Home buyers who don't have a lot of money saved up for a down payment can use this program to minimize their upfront costs.

In order to qualify for the lower down payment of 3.5%, the borrower must have a credit score of 580 or higher. Borrowers who meet the other FHA guidelines, but have credit scores below 580, will have to make a down payment of at least 10%.

Using Gifts from Family Members

If you can't come up with a down payment for an FHA loan by yourself, you could have it gifted to you from a family member. There are two key requirements for this strategy:

1. It must be an actual family member that gives you the gift.
2. There must not be any expectation for reimbursement. In other words, the funds must truly be a gift -- not a loan.

There must not be any payback requirements attached to the money. In fact, the family member will have to write a letter stating this very thing (view a sample letter). The letter says that the person is giving you this money for your down payment, and that they don't expect any reimbursement for the money.

Down Payment Assistance from Seller is Prohibited

In the past, it was possible to get down payment assistance from the seller when using an FHA loan. This happened indirectly through a loophole in their guidelines. The FHA previously stated that borrowers could get down payment funds only from a family member or a nonprofit organization. So a nonprofit called the Nehemiah Corporation stepped in to fill this role. 

Here's how it worked:

The seller would give the down payment to Nehemiah, and they would turn around and forward those funds to the settlement company. So the seller was basically paying for some, or all, of the buyer's down payment. But it wasn't coming directly from seller. It was coming from the nonprofit. It's all a moot point today, because this arrangement is no longer allowed by HUD.

The FHA Modernization Act of 2008 prohibited seller-funded down payments on FHA loans. You can look up the full text of this legislation online. If you refer to Section 2113 of the act, you will see that it prohibits down payment contributions from the seller. It also says the borrower's down payment funds cannot come from any third party that requires reimbursement. But it does allow gifted funds from a family member, as long as they provide the gift letter we discussed earlier.

Here's a snapshot of Section 2113, where it talks about prohibited sources:

Sellers Can Still Contribute to Closing Costs

While the seller cannot make any contributions to your FHA down payment, they can make contributions to your closing costs. Under current FHA guidelines, the seller can contribute up to 6% of the purchase price to your closing costs.

There has been some talk of reducing the maximum seller concession to 3%, but that hasn't happened yet (as of March 2011). There was a HUD news release in early 2010 that said they were going to reduce the maximum seller concession from 6% to 3%.

The HUD release stated that "this change will be posted in the Federal Register in February [of 2010], and after a notice and comment period, would go into effect in the early summer [of that same year]."

So they were supposed to implement the new rule in late 2010. But there has been no official word from FHA or HUD regarding his change. Currently, it seems that some lenders are still allowing sellers to contribute 6% toward the buyer's closing costs. They just can't contribute any money to your down payment.

When Do I Need My Down Payment?

Most lenders require your FHA down payment funds to be in the bank at least two months before the closing date. But this is not a hard and fast rule. It may vary from one lender to the next. But to avoid any problems, you should strive to have your funds in the bank at least two months before closing.

When you apply for an FHA loan, you'll have an opportunity to ask questions about all of this. Ask the lender about their specific requirements for down payment funds. If you plan to have some money gifted to you from a family member, ask about the requirements for this as well. They will probably require the family member to write a letter like we talked about. They might even want to see a paper trail that shows where the funds are coming from (i.e., account statements from the person contributing money).

Disclaimer: This information was updated in April 2011. As you can see from this article, the FHA's guidelines change from time to time. We mad every effort to ensure the accuracy of this mortgage guide. Nevertheless, we recommend you speak to an FHA-approved lender to learn about the current rules for down payments.