It happens every year. As the calendar turns over, the FHA rumors begin. This year, the most pervasive rumor has to do with the minimum down payment requirement for FHA loans in 2014.
Here is a recent email from one of our readers that underscores the point: “I have heard that FHA is increasing the down payment required on FHA loans to 10%, across the board. Is this true?”
No, it’s not. There is actually a two-tiered down payment requirement for FHA loans in 2014. One of those tiers does, in fact, sit at 10%. But the absolute minimum is 3.5% of the purchase price. Here’s what borrowers need to know.
3.5% Minimum Down Payment for FHA Loans in 2014 (Still)
There have been many changes to the FHA program over the last few years, as the agency continues to recover from the housing market collapse. The Department of Housing and Urban Development (HUD), which manages the program, has increased mortgage insurance premiums, changed the cancellation policy for those premiums, stiffened the underwriting process, and also reduced the loan limits available throughout the U.S.
But there have been no changes in recent years to the minimum down payment requirement for FHA loans. Nor do we expect any changes in 2014. The last change occurred in 2008, as part of the FHA Modernization Act. That’s when the minimum down payment was raised from 3% of the purchase price to 3.5%.
According to a report from the Congressional Research Service (CRS):
To obtain an FHA-insured loan, prior law required borrowers to contribute at least 3% in cash or its equivalent to the cost of acquiring the property. The [2008 modernization] act increases the cash requirement to3.5% of the sales price.
So, how much will you have to put down when using an FHA-insured home loan in 2014? At least 3.5%. This minimum was put in place in 2008. There have been no changes or adjustments to the minimum down payment for FHA loans since 2008. But there was a second tier introduced in 2010, and it affects borrowers with credit scores below 580. So let’s talk about that next.
10% Requirement for Borrowers With Credit Scores Below 580
On September 3, 2010, the Department of Housing and Urban Development issued Mortgagee Letter 10-29. These letters are issued whenever HUD makes changes to the FHA program. This particular letter established a second down-payment requirement for borrowers using this government-backed mortgage program. They left the 3.5% minimum where it was, but they assigned a credit score overlay and a secondary down-payment tier at 10%.
It breaks down like this:
- Borrowers with credit scores of 580 or higher are eligible for maximum financing of 96.5% (down payment of 3.5%).
- Borrowers with scores between 500 and 579 are limited to 90% LTV (for a down payment of at least 10%).
- Borrowers with scores below 500 are not eligible for an FHA loan.
These rules have not been revised are superseded since they were issued in 2010. They are still in effect today, so they represent the minimum down payments for FHA loans in 2014.
At present, HUD does not have any immediate plans to change these requirements. But that doesn’t mean they won’t do so in the future. The relatively low down payment is a key aspect of the Federal Housing Administration’s loan program. The entire program is designed for responsible borrowers who cannot afford a larger down payment of, say, 10%. This is a central component of the program. So it is unlikely to be changed in any significant way.
To learn more about FHA down payment requirements, or other eligibility criteria for borrowers, refer to HUD Handbook 4155.1.