How To Get An FHA Loan With No Money Down

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 an 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 without using any of your own money. 

  1. Gift Funds
  2. Seller Contributions
  3. Lender Credit

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 FHA Your 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.

Seller Contributions

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.

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 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. Hopefully you found this to be helpful and that you will trust us to also help you with your home loan.

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