How A lot Do I Put Down On An FHA House Mortgage?
There are persistent myths and misconceptions about home loans.
One persistent myth is that FHA mortgages are only approved for first-time home buyers. Another is that FHA loans are only for low to middle income borrowers.
And a third – and the focus of our article – is that on a home loan, you need to make a 20% down payment.
What is the reality
FHA home loans do NOT require a 20% down payment even if you are on the lower end of the qualifying credit score range. Under the FHA loan rules, you don’t have to pay more than 10% on an FHA mortgage (on FHA paper). That’s for borrowers who don’t have FICO scores that qualify them for 3.5%.
Why do people think you have to go 20% without a home?
One reason for this is that traditional mortgages require the borrower to pay a 20% deposit so as not to have to pay for mortgage insurance. It’s not surprising that people want to consider eliminating those particular expenses altogether, and in fact some are paying 20% less on a home to do just that.
But FHA mortgages don’t require it, and even if you pay 20% less, you won’t get rid of the FHA mortgage insurance requirement that applies to all FHA forward mortgages.
Your FHA mortgage insurance requirement includes both a prepayment for mortgage insurance (this can be paid into the loan amount or paid in full upon completion) and the monthly mortgage premium.
Depending on the loan-to-value ratio and other variables, your obligation to pay for mortgage insurance is either 11 years or the term of the loan amount.
What if a borrower wants to make a larger down payment anyway? While a 20% down payment isn’t a killer for mortgage insurance, it does offer a cheaper loan – your principal balance will be lower, so interest rates will also decrease over time.
They also include faster loan repayment and no penalty for prepaying the mortgage. Whether you are expecting a contractual penalty for early repayment, sale or refinancing, you need to read the fine print for conventional loans.
FHA loans do not need such provisions in the fine print because federal law prohibits lenders from charging FHA borrowers to prepay their mortgage loan.
One advantage of personal contribution is that you can also apply for down payment and final financial aid to programs in your city or state.
The money you pay along with the down payment aid could really make a difference in the final settlement of your monthly mortgage obligation.
If you are unsure whether a higher prepayment might help, speak to a loan officer and explain your financial needs and goals. A good loan officer will listen and try to find ways to meet your needs.