What Affects My Down Payment for an FHA Loan?
There is no fixed number for home loan down payment requirements. For FHA mortgages, conventional loans, VA mortgages, and other home loans, any down payment calculation will be based on a percentage of the asking price of the home.
FHA home loan rules say that for new purchase loans, the lowest possible down payment is 3.5% of the adjusted value of the home. How much is that? Can’t the borrower simply guess a down payment amount based on the sale price of the home?
Technically speaking, yes, but it’s important to remember that the appraisal may or may not come back with a dollar amount that matches the sale price. If the appraised value of the home is lower than the asking price, the borrower can’t be forced to purchase.
Why? Because the amount of the difference between appraised value (in this case lower than the asking price) and the price of the home must be paid in cash at closing time and cannot be included in the loan amount. The borrower can’t be forced to come up with that additional cash, and is free to walk away from the deal in such cases without penalty.
But what if the borrower loves the home and wants to pay the difference? It’s technically not a down payment, but for budget purposes it may as well be.
But that is one reason why using the sale price of the home to estimate the down payment only tells part of the story (depending on circumstances). It’s best to anticipate that you may need more cash to close than you expect before the appraisal happens for this reason.
What else affects your down payment? For some borrowers, FICO scores. If you have low or marginal credit scores, you may not be rejected for a loan out of hand, but much depends on the lender’s willingness to approve your loan based on additional compensating factors.
One of the most common of those compensating factors is a larger down payment. Your loan officer may be willing to compromise with you if you have lower FICO scores or other credit issues IF you are willing to make a bigger down payment.
For FHA home loans, that bigger payment is likely to be 10% of the adjusted value of the home. If you are concerned about past credit mistakes, it’s a great idea to save up for your down payment anticipating a higher requirement just in case--you can always use the cash you saved but didn’t need (ideally) for the down payment for closing costs or other home loan-related expenses.
Talk to a loan officer about your home loan needs today--you’ll be glad you did.
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