2014 FHA Down Payment Requirements (Minimums, Assistance, Gifts, etc.)

Reader question: "We want to use an FHA loan to purchase a home, because we have heard it is easier to get approved with this program. But I am confused about the down payment requirements for FHA mortgage loans in 2014. I have seen 3.5% mentioned on many websites as the official minimum amount. But I also read that they were increasing the minimum sometime in 2014. Can you clarify this for me please? What are the 2014 FHA down payment requirements for home buyers like myself? How much do I have to put down when using this program? Are there any assistance programs available, and do they allow down payment funds in the form of a gift or loan?"

Overview of FHA Down Payments Requirements in 2014

The Federal Housing Administration's mortgage insurance program has become increasingly popular among home buyers, especially those who are buying their first home. One of the things that makes this program so popular is the minimum down payment requirement. There have not been any changes to this program over the last year, as far as down payments are concerned (though there have been a few proposals). As a result, the FHA down payment requirements for 2014 will be the same as last year.

Borrowers must put down a minimum of 3.5% of the purchase price when using this loan program. That is the absolute minimum for program eligibility. Stated differently, the FHA will finance up to 96.5% of the purchase price, for an approved property.

Those are my own words. Here is how HUD explains it in their Handbook 4155.1:

"In order for FHA to insure this maximum loan amount [96.5% LTV], the borrower must make a required investment of at least 3.5% of the lesser of the appraised value or the sales price of the property."

To qualify for this option, you will need a minimum "decision credit score" of 580 or higher. If your score is between 500 and 579, you might still be approved for a loan, but you will have to make a down payment of at least 10% of the appraised / sales price -- if you can get approved at all.

There have been frequent and recurring rumors about HUD increasing their minimum down payment requirements. Sometimes the rumors are the result of actual proposals made by the Department of Housing and Urban Development, or even by members of Congress who wish to reduce the government's involvement within the housing market. But, as of right now, the standard requirement for 2014 remains at 3.5% at a minimum, and at 10% for borrowers with credit scores below 580. I confirmed this on the HUD website when writing this response, just to be sure.

Allowable Gifts and Assistance

That covers your first two questions. Let's move on to talk about down payment assistance programs and gifts.

The FHA does not have a formal down payment assistance program. In a sense, the program itself is a form of assistance for home buyers. It allows borrowers to put less money down when compared to conventional or regular home loans. That was one of the primary reasons for its creation, many years ago.

With that being said, FHA does allow certain types of third-party assistance. In HUD Handbook 4155.1, Chapter 5, they have a list of "acceptable sources for borrower funds." It is basically a list of ways you can come up with your down payment, while still meeting their requirements and criteria.

For instance, they allow the funds to come from a charity organization, as long as that organization does not expect any form of repayment or reimbursement.

Your down payment funds can also come from a family member, in the form of a gift. But here again, there is a repayment clause. The person providing the funds must also provide a letter that states they do not expect you to pay it back. In other words, it must truly be a gift -- and not a short-term loan.

You can find instructions on all of this in the HUD handbook mentioned above.

Certain Types of Loans and Grants Are Allowed

Can you use a third-party loan to cover the down payment costs on an FHA loan? This is another frequently asked question among home buyers. The answer is that it depends. You cannot use a "regular" unsecured personal loan to cover this expense. HUD does not allow it.

According to 2014 FHA guidelines, borrowers cannot use funds that come from:

unsecured personal / signature loans
credit cards
cash advances

So what can you use? According to HUD Handbook 4155.1, Chapter 5, Section 'B,' borrowers may use certain types of loans that are "secured by assets such as investment accounts or real property."

Grants or loans from state or federal agencies, such as FEMA, can also be applied toward the down payment. Disaster-relief loans provided by the Small Business Association are also acceptable.

This is only a partial list of acceptable funding sources. For a more complete list of grants and loans that can be used to cover the down payment expense, refer to HUD Handbook 4155.1 (you can Google it to find the online PDF version).

This is just a basic overview of FHA down payment requirements in 2014, including third-party assistance, gifts and grants. If you have additional questions about this program, or the acceptable sources of borrower funds, refer to the official HUD website or speak to an approved mortgage lender.

Disclaimer: The Federal Housing Administration's mortgage-insurance program is administered by the Department of Housing and Urban Development. Portions of this article were adapted from official HUD guidelines. Program guidelines change all the time. As a result, portions of this article may become outdated in time. For the latest information available, please refer to the HUD.gov website, or call their toll-free number at (800) CALL-FHA (225-5342). You can also contact the department by email at [email protected].