No down payment FHA loan means these loans have lenient qualifying requirements and lower down payments than conventional mortgages, though they do carry some additional costs. If you’re a first-time buyer or someone with less-than-perfect credit, an no down payment FHA loan could be a good fit.
Saving for a down payment starts with setting a goal and cutting expenses everywhere you can. 3.5 percent in cash down can look different depending on what kind of home you’re buying, so use Bankrate’s down payment calculator to get a sense of the lump sum you’ll need.
Down Payment Requirements
The Federal Housing Administration (FHA) has long been known for its flexible lending requirements, making it a popular choice for first-time homebuyers with limited down payment savings and lower credit scores. However, there are some limitations to this program.
You’ll need to show that you can afford your monthly payments, including the mortgage insurance premium. Your debt-to-income ratio is also a key factor in your FHA qualification. Having a high DTI may mean you need a higher down payment or higher credit score than the minimums to get approved.
In addition, no down payment FHA loan require lenders to check your CAIVRS report, which lists your defaults on government-backed loans like student loans, Small Business Administration (SBA) loans and previous VA or USDA loans. Unpaid child support or other delinquent debts can also cause you to lose your chance at an FHA loan.
If you’re a first-time homebuyer, it’s a good idea to shop several FHA-approved lenders to find the best mortgage rate. These may include mortgage brokers, local banks and credit unions or an online rate comparison site.
A lender will review your credit history, employment and income to determine whether you qualify for an FHA loan. Applicants are typically required to provide two years of pay stubs and W-2 forms, along with their employer’s contact information.
The lender will also want to see a copy of your credit card statements and bank account statements to verify that you have enough cash reserves to make your mortgage payments each month. In some cases, the lender may require that you have a few months’ worth of cash on hand in case your financial situation changes.
If you’re receiving a gift from someone for your down payment, closing costs or cash reserves, the lender will need to see a formal gift letter from the donor and a copy of their financial statement to determine that the funds are genuine gifts without any strings attached. An expectation that you’ll repay the money could hurt your debt-to-income ratio or make it difficult for you to afford your mortgage payments.
No Down Payment FHA Loan: Gift Funds
A no down payment FHA loan can be a great way to buy a home for first-time buyers or low-income borrowers. However, it can be difficult to come up with the funds needed for a down payment. In these cases, gift funds can be a valuable help. But it’s important to follow certain guidelines if you want to use these funds to get approved for an no down payment FHA loan mortgage.
Gift funds for down payments are allowed by some lenders, and can cover both your down payment and your closing costs. But you will need to provide documentation for the gift money, including a signed letter from your donor that states that the funds are a gift and not a loan.
You will also need to show a paper trail, which means submitting bank statements that show the money has left the donor’s account and been deposited into yours. This helps the lender determine if the gift money is genuine, and shows that you’re not borrowing or using it to pay your mortgage.
The gift money can come from friends or family members, but it must be sourced and verified, according to the rules of the particular loan program. For example, Fannie Mae loans allow gift funds from relatives, while no down payment FHA loan permit them to come from friends and close family members.
But if the gift fund comes from an employer or union, a charitable organization, or a government agency, it must be verified by the lender. The loan application binder must include a gift letter and a copy of the paperwork from the source.
Lastly, the lender will need to see an updated bank statement of the gift recipient’s account, and it must be at least 30 days old. The lender will then be able to examine the seasoning of the gift money.
If the gift is a cash gift, you may be required to pay taxes on it, depending on where you live and how much it’s worth. It is best to consult with a tax expert before deciding to gift a home.
No Down Payment FHA Loan: Closing Costs
Closing costs are expenses and fees that a buyer and seller pay during a home-buying process. They include mortgage application fees, a credit check fee, an attorney fee, property taxes and homeowners’ insurance, as well as other fees associated with executing a loan and taking ownership of a home.
Generally, closing costs are between 2 percent and 6 percent of the total loan amount. However, this is a rough estimate and can vary based on the size of the loan.
FHA borrowers also pay upfront mortgage insurance premiums (UMIP) and monthly mortgage insurance premiums (MIP) that are required by the Federal Housing Administration. UMIP and MIP can make up a significant portion of your closing costs, so you may want to discuss this with your lender before submitting your application.
Borrowers who aren’t able to afford the up-front and ongoing MIP costs can use lender credit for closing costs. This credit can be rolled into the loan and will not count against your down payment, but you can only use it to cover the amount of the loan that is being covered by the closing costs.
Another way to save on closing costs is by asking the seller to contribute money toward your loan. With FHA loans, sellers can gift up to 6% of the purchase price towards your closing costs.
These contributions are often referred to as seller concessions and can be an excellent choice for first-time homebuyers who don’t have enough cash on hand to cover their closing costs. They’re usually a one-time expense and won’t be factored into your monthly payments, but they can add up over time.
Finally, some lenders will offer a “no closing cost” option for first-time buyers, although this typically comes with higher interest rates. Alternatively, you can ask the seller to pay your closing costs and roll them into your loan.
As with all mortgages, you should budget between 3% and 6% of the loan amount to cover closing costs. You can find a good estimate of what these costs will be by speaking with your mortgage lender or real estate agent.
The Federal Housing Administration (FHA) provides a variety of government-backed loans that can make buying a home more affordable. They include mortgages that don’t require down payments and loans for people with lower credit scores than traditional mortgage lenders typically look for.
These mortgages often have interest rates that are competitive with conventional loans, and there are several ways to save money on these. For starters, you can use an FHA loan to pay for energy-saving upgrades that will help you reduce your utility bills.
Another way to lower your home loan costs is to put a larger down payment on the property you purchase. This can be done in several ways, including by borrowing from a bank or putting down more of your own cash.
Using a combination of these strategies can allow you to buy a home with less cash down, which can help you get into the house sooner and avoid higher monthly payments that come with paying PMI (private mortgage insurance).
In addition to reducing your debt-to-income ratio, making a large down payment can also boost your FICO score. This can be especially beneficial if you have a low credit score and need to improve it to qualify for an FHA loan.
For those with a higher credit score, putting down even more can help you qualify for a better rate on a home loan. This is especially true if you have an interest rate that is set to go up soon.
As with all loans, the interest rate on a no down payment fha loan is tied to your credit score and other factors, such as the amount you plan to borrow and the mortgage limits in your area. These limits vary by location and are adjusted annually.
If you are looking to buy a house, consider comparing no down payment fha loan offers from a range of lenders before choosing one. This will help you decide which option best suits your needs and budget.
You can also compare the cost of closing an FHA loan to a conventional loan, which will include mortgage insurance. The difference can be significant and could affect your monthly payments. A good rule of thumb is to shop around and compare rates and costs from at least three to five lenders before committing.