How to Come Up With Your FHA Loan Down Payment

Here are some options for sourcing the cash

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 Getty Images/Vichien Petchmai

Though the required down payment on an FHA loan is far lower than you’ll need for most conventional loans, it still amounts to a hefty sum. At the very minimum, the FHA down payment is 3.5% of the home’s sales price —or $7,000 on a $200,000 house.

If you don’t have much in the way of savings, this number might seem daunting, especially when you throw in closing costs and the other upfront expenses of buying a home

If you can be patient, saving up the cash is your best move. But tapping your savings account isn’t your only option. The Federal Housing Administration, which guarantees FHA loans, accepts down payment funds from a number of sources. So your dream house may still be within reach, no matter what your bank balance might look like.

Gift Money

If your parents, grandparents or another family member is willing to give your cash, you can use those gifted funds for up to 100% of your FHA down payment. 

As nice as they sound, gift funds also come with a few hurdles. First, you’ll need to make sure the gift-giver is is willing to fully document the gift, which means showing records of their bank account before and after the transaction.

Your family member will also need to write a gift letter for your lender, verifying your relationship and assuring them that the money was, indeed, a gift—not a loan you’re expected to pay back over time. 

Down Payment Assistance Programs

Down payment assistance programs can also help you cover the costs of purchasing your home. Many of these come in the form of grants, meaning you won’t need to pay them back, though others come in the form of tax credits or as second mortgage loans. Some programs are only available to first-time homebuyers.

There aren’t many downsides to using a payment assistance program, though ones that act as second mortgage loans may require you to pay interest. However, you need to qualify for a program. For the most part, down payment assistance programs are reserved for lower-income buyers who could not otherwise purchase a property. 

If you think you might qualify for a down payment assistance program, start by looking at HUD.gov. You can also check with your local city or state housing agency.

Withdrawing From an IRA Account

If you have an IRA or Roth IRA to help you save for retirement, you can tap into those funds to cover your down payment. 

Before you consider tapping retirement funds, however, make sure you understand the drawbacks. First, if you’re under age 59.5, you’ll likely face a 10% penalty on the withdrawal. You’ll also need to pay income taxes on the funds from an IRA, or gains from a Roth IRA.

There’s one exception to this rule: withdrawals from a Roth for first-time homebuyers. As long as you meet certain criteria, you won’t pay a penalty for withdrawals up to $10,000.

This isn’t a strategy to take lightly. You’ll lose out on the interest you would’ve gained on the money you take out. That means it will take longer to reach a comfortable level of savings in order to retire.

Borrowing from a 401(k)

Your employer may also allow you to take a loan from your 401(k).  

This strategy has significant downsides, too You’ll need to pay the loan back, plus interest, within five years. If you leave the company, you’ll have to pay back the money right away, or you’ll owe a penalty.

You could also simply tap your 401(k). But as with the IRA funds, you’ll owe a 10% early withdrawal penalty and income taxes on the amount you take out—and potentially impact your retirement down the line.

Crowdfunding

There are also more non-traditional methods you can use to acquire your down payment funds. Crowdfunding through sites like HomeFundIt, Feather the Nest, and Honeyfund let you tap your friends and family for potential cash. Just keep in mind that you have to pay taxes on crowdfunded income. 

Article Sources

  1. Department of Housing and Urban Development: "Acceptable Sources of Borrower Funds," Accessed Oct. 29, 2019

  2. Consumer Financial Protection Bureau: Where can I get money for a down payment on a home mortgage?

  3. Fannie Mae: Topic: Personal Gifts

  4. New Mexico Mortgage Finance Authority, "Mortgage and down payment assistance loans for non-first-time homebuyers." Accessed Oct. 29, 2019

  5. IRS: "Retirement Topics - Plan Loans," Accessed Oct. 29, 2019