FHA Down Payment Requirements
One of the primary advantages of an FHA loan is the low down payment requirement. According to HUD guidelines, the minimum down payment for an FHA loan is 3.5% of the purchase price or appraised value (whichever is lower). This means on a $250,000 home, you would need just $8,750 as a down payment. However, borrowers with credit scores between 500 and 579 are required to make a minimum down payment of 10%.
Acceptable Sources for Your Down Payment
FHA guidelines, as outlined in HUD Handbook 4000.1, specify which sources of funds are acceptable for a down payment:
- Personal savings: Funds from your own checking or savings accounts, documented with bank statements showing at least two months of history.
- Gift funds: Money gifted by a family member, employer, labor union, close friend with a documented relationship, or charitable organization. A gift letter must confirm the funds are not a loan.
- Down payment assistance programs: Grants or secondary financing from government agencies or HUD-approved nonprofits.
- Sale of assets: Proceeds from selling stocks, bonds, real estate, or other assets with proper documentation.
- Retirement accounts: Funds from 401(k) or IRA withdrawals, though tax implications should be considered.
Sources That Are NOT Allowed
FHA rules explicitly prohibit certain down payment sources to prevent predatory lending and ensure borrowers have a genuine stake in the property:
- Cash advances from credit cards
- Personal loans or borrowed funds that must be repaid
- Seller-funded down payment assistance (prohibited since 2008)
- Undocumented cash deposits (large deposits must have a paper trail)
- Sweat equity (except in certain HUD-approved self-help programs)
Down Payment Assistance Programs in Pennsylvania
Pennsylvania offers several programs that can help FHA borrowers with their down payment:
- PHFA Keystone Advantage Assistance Loan: Provides up to $6,000 as a no-interest second mortgage for down payment and closing costs. This can be combined with an FHA first mortgage through PHFA.
- PHFA HFA Preferred Program: Offers reduced mortgage insurance and can be paired with down payment assistance.
- Local municipal programs: Many Pennsylvania cities and counties offer their own homebuyer assistance programs. Philadelphia, Pittsburgh, and other municipalities have programs with grants or forgivable loans for qualifying buyers.
Strategies to Save for Your Down Payment
Even with FHA's low 3.5% requirement, saving for a down payment takes planning. Set up a dedicated savings account and automate monthly transfers. Reduce discretionary spending and consider a temporary side income. If you receive a tax refund, bonus, or other lump sum, direct it toward your down payment fund. Remember that you will also need funds for closing costs, typically 2-5% of the purchase price, so plan accordingly.