How To Get An FHA Loan With No Money Down
FHA loans will always require a down payment but this method shows you how to get a No Money Down FHA loan without using any of your OWN money.
There are three ways to use money from other sources to essentially purchase a home with an FHA loan with zero down (well, none of your own money).
- Gift Funds
- Seller Contributions
- Lender Credit
Before we describe how to get a no money down FHA loan, we will give you the basic details, benefits and requirements for an FHA loan.
FHA Lenders who are federally approved to originate FHA loans will follow the guidelines set but the government agency (FHA – Federal Housing Administration). These guidelines are the same no matter which lender you use. The program is designed to help people to own a home while making sure they have the ability to repay the loan. These lenders are protected from foreclosure by a mortgage insurance premium (MIP) that is paid by the borrowers and is explained below.
FHA Mortgage Benefits
- FHA mortgages allow for low credit scores. Sometimes as low as 500 with a higher down payment.
- FHA mortgages require very low down payments. Today that is set at 3.5% with credit scores down to 580.
- FHA mortgages never have pre-payment penalties.
- FHA Mortgage rates are lower even though the down payment and sometimes the credit score is also low.
Other FHA Loan Requirements
- FHA mortgage loans require both taxes and insurance to be escrowed. Those payments are included in your monthly mortgage payment.
- They require you to have a mortgage insurance premium (MIP). Always an FHA requirement if you put less than 20% down.
- You must have a minimum of a two year work history with no gaps in employment during that time.
- You must occupy the home as your primary residence and you also must live in the home for at least 1 year after closing on the loan.
If your down payment is less than 20% of the purchase (or 20% of the value on a refinance), you will be required to have MIP (Mortgage Insurance Premium) which is a percentage of the loan and also can be financed (rolled into the loan) so that you do not have to pay out of pocket.
What is FHA Mortgage Insurance (MIP)?
The FHA mortgage insurance premiums (MIP) provide lenders with protection against any future losses in the event that a borrower defaults on the loan. The lenders are protected because the FHA will cover the FHA lenders’ losses in the event of a homeowner’s default. Loans must meet the requirements referenced above (established by the FHA) to qualify for insurance.
How To Get an FHA Loan With No Money Down
If you follow some of all of the steps below, you will be able to finance the purchase of the home without using any of your own money. That being said, you may need to show that you have some funds for qualification purposes but in the end your goal is not to use it. Check with one of our lenders for more details.
Gift Funds For Your FHA Down Payment
FHA loans require a 3.5% down payment. However, the good news is that you can get that gifted to you by someone else. There are strict guidelines as to where or who these funds can come from. The approved sources are as follows:
- A family member
- Your employer
- A credit union
- A charitable organization
- A close friend (some verification may be required)
- A government agency that provides assistance in this area
It is important to note that these funds are not borrowed. They are a gift and there is no expectation that they will be repaid. If you are purchasing the property from a family member, they may also gift to you a portion of the equity in the home. Your lender will require you to provide a gift letter which essentially is a letter from the person who is giving you the money stating that it is a gift and there is no expectation of repayment.
FHA guidelines allow for seller contributions up to 6% of the purchase price of the home. This is more than enough to cover your closing costs. Especially when you consider the fact that FHA closing costs range from 2%-5%. These seller contributions are handled at closing which means you do not need to come to the table with those funds. However, they must be negotiated in advance. The contributions do not have to come from the actual seller of the home. “Seller” also means the builder, the real estate agent or any other interested party on the selling side of the transaction.
The 6% contribution may be used towards the following:
- Closing costs
- Origination Fees
- Discount Points
- Temporary or permanent interest rate buy downs
- Payments for mortgage interest
- Payments against the upfront mortgage insurance premium.
How can you get the seller to pay for these costs? It really is not that difficult. The seller wants to sell the home. You have a good faith estimate already detailing what your closing costs will be. As an example, let’s assume that you negotiated a reduction in the listing price of the home by $5,000. You can see that your closing costs will be $3,700. At that point, you ask the seller to only reduce the price of the home by $1,300 but then also pay for $3,700 in closing costs. For the seller, it should make no difference. This seller contribution tactic is used in many purchase and loan situations and is not specific to FHA loans. It actually may benefit you to offer full price on the purchase of the home if the seller agrees to cover your closing costs. Your difference in your monthly payment will be negligible.
Lender Credit or Premium Pricing
I mention premium pricing because what happens when a lender provides you with a closing cost credit is that they charge you a bit of an interest rate premium to offset those costs. If for example, the lender is going to cover your $3,700 in closing costs, they may have to increase your rate by a an eighth or a quarter point. This will trigger additional compensation for them to cover your closing costs. Make sense?
Lenders are permitted to cover some of your costs via the lender credit or premium pricing and those funds:
- Must be used towards closing costs and if their credit exceeds the total of those closing costs, then any additional dollars remaining must be used to reduce the loan balance.
- The funds may not be used to cover escrow shortages, collections, debts, or any missed mortgage payments.
Any and all use of lender paid funds must be disclosed in the closing documents.
I have outlined multiple ways to buy a home with an FHA loan without using any of your own funds. If you follow these three steps, you should be successful in reducing your out of pocket expenses when purchasing a home with an FHA loan. Hopefully you found this to be helpful and that you will trust us to also help you with your home loan.
No Money Down FHA Loan Frequently Asked Questions – FHA FAQ
Q: Can you refinance with an FHA loan or even get an FHA Cash Out Refinance loan?
A: Yes, click to read about the FHA Streamline Refinance Program
Q: Is it easy to get an FHA loan?
A: It is easy to qualify for an FHA loan but there is a little more paperwork needed for these loans. A little more difficult or time consuming for your lender.
Q: Are FHA loans just for first time home buyers?
A: Although FHA loans are popular with first time home buyers, they are also for anyone who can meet their qualifications. They are not limited to first time home buyers.
Q: What is the FHA down payment requirement?
A: You will need to put down 3.5% for an FHA loan unless your credit scores are below 580.
Q: Can I get a no money down FHA loan?
A: Yes, if you implement the tactics referenced above.
Q: Do FHA loans require mortgage insurance?
A: Yes, if you are putting down less than 20%, you will need to pay monthly MI (Mortgage Insurance)
Q: Can veterans apply for an FHA loan?
A: Yes, but they will need to submit a DD form 212 with your application. We believe the best program for veterans is the VA Loan.
Q: What are the FHA mortgage loan fees?
A: We recommend that you contact an FHA lender here to outline all of the fees that may pertain to you.
Q: What is the FHA Loan limit in my area?
A: We recommend that you discuss this with one of our lenders or click the link above where you can research the limits in your area.
Q: Can I get an FHA loan with bad credit?
A: Yes, you can but the down payment requirement may be higher as well as the interest rate.
Q: How long do you have to live in a house with an FHA loan?
A: You must remain in the home for 12 months after closing on an FHA loan.
Q: What is the FHA contact number?
A: You can call them toll free at (800) CALL-FHA (800-225-5342)
Q: Are FHA loans for owner occupied borrowers only?
A: Yes and you must live in the home for at least 12 months.
Q: Do FHA loans have income limits?
A: There are no minimum or maximum income limits set for an FHA loan.
Q: When was the FHA (Federal Housing Administration) created?
A: It was created in 1934, just a few years after the banking crisis which occurred in the early 1930’s
Q: Can you have two FHA loans?
A: It is possible to have 2 FHA loans but you would have to qualify for both which is why it is not something that you see too often.
Q: Can I get an FHA loan if I already own the home?
A: You cannot refinance a conventional loan into an FHA loan unless you can prove to have certain hardships.
Q: Can you rent out the house if you have an FHA loan?
A: You must occupy the home as your primary residence for the first 12 months after buying. After one year, it is possible to then move and rent out the home.
Q: Can I get a co-signer for an FHA loan?
A: Yes, co-signers are permitted with an FHA loan.
Q: Can you do a cash out refinance with an FHA loan?
A: Yes as long as the maximum LTV does not exceed 95%
Q: Can I get a HELOC or home equity loan if I have an FHA loan.
A: The FHA does not back or insure home equity loans. You would need to get those from a different lender as long as you meet their guidelines.
Q: What is the HOPE program?
A: It is a program designed by HUD to help families who are currently living in public housing.
Q: What is an FHA case number?
A: It is a 10 digit number that is assigned to the FHA borrower’s file or loan. It is a tracking mechanism.
We are able to help you to find an FHA loan with the best FHA lenders in the following states: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming.