The FHA loan program has become increasingly popular among home buyers with limited funds for a down payment. In fact, it is now the tool of choice for such borrowers. This is according to a statement by David Stevens, president of the Mortgage Bankers Association (MBA).
In an article for American Banker, Stevens said: “Today, the FHA is the dominant source of mortgage financing for borrowers with low down payments … Many of these are first-time homebuyers.”
FHA Lowest Down Payment, Aside from VA and USDA
So, how low is the down payment on an FHA loan? Current guidelines require a minimum down payment of 3.5% of the purchase price, for a maximum loan-to-value (LTV) ratio of 96.5%. But this depends on the borrower’s credit score.
HUD Mortgagee Letter 10-29 states the following:
- Borrowers with a “decision credit score” of 580 or higher are eligible for maximum financing (96.5% LTV).
- Borrowers with scores between 500 and 579 must make a down payment of 10% (90% LTV).
- Borrowers with scores below 500 are not eligible for the FHA loan program.
This rule was introduced by the aforementioned HUD letter in September 2010, and it still holds true today. Granted, most mortgage lenders require higher scores than the HUD minimums. But that’s another story entirely.
In addition to the down-payment requirements, borrowers must meet the FHA’s other eligibility requirements as well.
Conventional, or non-government-backed, mortgages generally require a minimum down payment of 5%. Less-qualified borrowers may even be required to put 10% or 20% down for conventional financing. That’s why FHA is the tool of choice for home buyers seeking a low down payment.
Currently, the only loan programs that offer 100% financing are VA loans for military service members and their families, and USDA loans for low-income rural borrowers.
Agency’s Primary Mission: Insure Mortgages
The Federal Housing Administration was created by congress in 1934, in response to the economic devastation caused by the Great Depression. The agency was rolled into the Department of Housing and Urban Development (HUD) in 1965.
While its marching orders have changed over the years, the FHA’s core mission remains the same. It strives to make homeownership available to more Americans by insuring mortgage loans. This insurance protects lenders from losses resulting from borrower default.
The FHA’s popularity rose significantly in the wake of the housing crisis. The agency’s share of the mortgage market was only about 3% in 2005 – 2006. Those dates are noteworthy — they were during the boom years. In those days, almost anyone could qualify for a mortgage loan. And forget about low down payments. Back then, you could get a home loan with no money down whatsoever. Of course, we know the rest of this story. Reckless lending and rampant speculation eventually drove the economy into the ground.
The FHA’s market share has risen sharply in the years since the housing crash. Since 2008, the FHA has insured more than 25% of all U.S. mortgages. This is according to data collected by the Department of Housing and Urban Development.
Low down payments on mortgages, combined with easier qualification criteria, will ensure the popularity of this program for the foreseeable future.