FHA home loans have a minimum down payment requirement of 3.5% for borrowers with qualifying FICO scores. Down payments are a crucial part of most home loan transactions. What should you know about down payments aside from the need to save early?

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What to Know About FHA Down Payments and Earnest Money

June 23, 2024

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FHA home loans have a minimum down payment requirement of 3.5% for borrowers with qualifying FICO scores. Down payments are a crucial part of most home loan transactions. What should you know about down payments aside from the need to save early?

Earnest Money Is not Down Payment Money

Earnest money is what you pay when offering to buy a home. You pay this at offer time, not at closing time. A down payment is made at closing time in addition to the payment of other closing costs.

Earnest money is typically held in escrow, and if the transaction is canceled, the earnest money may be refunded to the borrower in qualifying circumstances, such as when the home is appraised at a lower than the asking price.

If the borrower chooses to cancel the transaction, they are owed a refund of the earnest money in escrow.

What to Remember About FHA Loan Down Payments

FHA loan rules require a down payment from approved sources and verification by the lender. Down payments are typically paid according to the lender’s instructions, and you likely will not be able to use a personal check at closing time to make payment.

Knowing this down payment requirement is key because borrowers who accept gifts from friends or family or who apply for down payment assistance from a local agency must take steps to ensure the lender can verify the source of those funds.

You are not allowed to hand over the down payment funds without explanation. Be sure to coordinate with your loan officer if you accept outside help for your down payment.

Borrowers who struggle with their down payment should consider options that can help free up cash to do so.
 
Negotiating a 6% seller concession on closing costs is one way, so is financing the FHA Up-Front Mortgage Insurance Premium instead of paying it in cash at closing time. Another option to consider is adding a co-borrower who shares your costs for the loan.

Adding a Co-Borrower

Co-borrowing isn’t the same as co-signing, and when you buy a home with another person, at least one of the borrowers obligated on the mortgage must occupy the home as their main address.

Two or more borrowers can share the down payment expense and closing costs. Co-borrowers who apply for FHA loans together can refinance to remove one borrower from the loan later on should one party or the other wish to buy their own home.

In such cases, there’s no down payment issue for the refi, but the borrowers should decide in advance how to buy out the departing party (including any compensation for the original down payment) to avoid complications later.

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