Zero Down FHA Loan
Although FHA loans do require a down payment of 3.5%, there are ways to get the down payment and closing costs paid for without bringing your money to the closing table. This will enable you to reserve those funds for home improvements, decorating, or other financial needs.
There are various benefits of an FHA loan which is why FHA loans are so popular and represent about 25% of all mortgages today. The benefits of an FHA loan are as follows:
- Low down payment
- Credit scores as low as 500 allowed
- Lower interest rates than conventional loans
- FHA loans are assumable
How to Get a Zero Down FHA Loan
You are able to get an FHA loan with no money down by applying for an FHA down payment assistance mortgage or taking advantage of the gift fund allowance. Although FHA loans have a standard 3.5% down payment requirement, you are able to get a zero down FHA loan without using any of your own money for the down payment or closing costs.
Top Methods to Buy a Home with a Zero Down FHA Loan
Using these three tactics below, you can buy a home without using your own money:
FHA Gift Funds – FHA guidelines clearly point out that your down payment can be a gift from a relative. Here are some other approved sources for your gift funds:
- A close friend
- A credit union
- Your employer
- A charitable organization
In our discussions with home buyers on a daily basis, many of them are able to buy their homes using gift funds. Read our article on FHA gift funds to learn more about what is needed to use gift funds for your own payment.
The FHA guidelines on gifts indicates that you must provide the FHA lender with a gift letter. In this letter, the individual who is providing the gift verifies that the money is truly a gift with no expectation of being repaid.
FHA Down Payment Assistance Mortgage – There are a limited number of lenders who offer a true zero down payment FHA mortgage. It is called the FHA loan with down payment assistance. With this mortgage, the lender will have a different closing cost structure and all of the fees can be rolled into the loan.
We have lenders who offer this program in a limited number of states. Fill out the short contact form and we will pair you with one of those lenders.
Lender Credit – Your FHA lender may offer a lender credit to cover your closing costs. However, this lender credit comes with a trade-off. You will likely have a slightly higher interest rate to offset those costs.
Lenders earn their commissions based upon a combination of things including your interest rate. If they charge a higher rate, they may earn the additional money needed to cover your closing costs.
FHA guidelines indicate that the lender credit can only be used for closing costs and not the down payment. Any credit over and above the closing cost total must be used to reduce the loan balance. The details of the lender credit and which costs they are covering must be clearly outlined in the closing documents.
Seller Contributions – During a purchase transaction, FHA guidelines permit the seller to cover your closing costs. The seller can contribute up to 6% of the purchase price towards your closing costs.
The seller contribution must be negotiated and identified well before the closing. Seller contributions are a great way for both the buyer and the seller to get what they are looking for. This is an excellent way to negotiate with the seller. You can get them to cover your closing costs if you agree to a higher sales price.
Seller contributions may cover some or all of these closing costs items:
- Discount points
- Closing costs
- Origination Fees
- Interest rate buy downs
- Payments for prepaid mortgage interest at closing
- The upfront mortgage insurance premium
Sellers are often willing to enter into a negotiation where they will cover your closing costs. This is also an excellent opportunity to have the seller pay for an interest rate buy down. The reduction in your interest rate could result in thousands in savings over the life of the loan.
FHA LOAN REQUIREMENTS
These are the minimum FHA loan requirements when applying for an FHA home loan. Even if you are looking to purchase the home with no out of pocket money, these basic loan requirements remain in place.
- Minimum FICO score requirement of 500 – down payment will vary
- Minimum down payment requirement of 3.5%
- Mortgage Insurance Premium (MIP) is required for every FHA loan
- Maximum debt to income ratio of 43%
- The home must be the primary residence
- The borrower must have a 2-year work history with steady income
- The debt to income ratio cannot exceed 43%
Read our comprehensive article on the FHA loan requirements. This is the one reference that will tell you everything you need to know about qualifying for an FHA loan.
Summary – Zero Down FHA Loan
These are proven methods to get a zero down FHA loan, or purchase a home with an FHA loan without using any of your own funds. You will likely still need a few months reserves to cover your first mortgage payments. Even those can be covered by the gift funds that you receive from a relative.
If you would like to discuss your options or even get an FHA rate quote, then click to connect to one of our FHA lenders for a free consultation.
Zero Down FHA Loan FAQ
Can I use a co-signer for the FHA down payment money?
FHA guidelines permit co-signers but it would not be the best thing to add the individual to the loan. If they have the funds for your down payment, then just ask them to provide that for you as a gift.
What is the down payment for an FHA loan?
FHA loans require a minimum down payment of 3.5% unless your credit score is below 580. With a score below 580, your FHA down payment will be 10%.
Can the upfront FHA mortgage insurance premium be covered by the lender or seller?
The upfront mortgage insurance premium can be covered by the seller or lender. Read our article about FHA mortgage insurance to understand what that cost will be.
Can I use a down payment assistance program with an FHA loan?
Down payment assistance programs are allowed for FHA loans and they can be another way to offset your out of pocket costs related to an FHA loan. However, you must find those programs on your own. Your lender cannot help with down payment assistance.
What are the zero down FHA loan interest rates?
The method used to reduce your out of pocket expenses for your FHA loan should not impact your rate at all. You should still get a great rate even if using gift funds for your down payment and the seller or lender covering your closing costs.