Buying a Home: Down Payment Issues

April 11, 2023

There are few opportunities for a zero-down home loan--at least not as many compared to standard “down payment required” mortgages.

VA home loans have a no-money-down home loan, but these loans are only for those with qualifying military service. USDA mortgages also feature a no-down payment option, but these are typically need-based loans with household income caps.

What’s a borrower to do if they are worried about coming up with the minimum FHA loan down payment of 3.5%?

Taking Extra Time to Save for Your Down Payment

“Don’t be in a hurry to buy if you struggle to come up with a down payment” is rather obvious advice, and sometimes it’s not possible to delay your search for housing. What’s a borrower to do?

It might be tempting to take a shortcut to save money by getting a credit card cash advance, a payday loan, or some other form of non-collateralized borrowing.

Don’t give in to that temptation. FHA home loan rules in HUD 4000.1 say you cannot use such funds for your down payment. The lender will check the sourcing of that money and ask you to provide documentation that it does NOT come from a payday loan, pink slip loan, cash advance, etc.

You can get down payment help from friends and family, but they are subject to the same restrictions where sourcing the money is concerned.

Getting Help With Your Down Payment

Not friends-and-family help, but formal down payment assistance from a state or local program in your area.

Some people read about down payment assistance and mistakenly believe they can get it directly from the Federal Housing Administration, but the FHA does NOT offer down payment assistance. Check your state government’s official site for local down payment and closing cost assistance programs in your area.

Down Payment Issues for Construction Loans

If you want to build a home from the ground up on your own lot using an FHA One-Time Close construction loan, it is not safe to assume you have the same downpayment assistance options as you do when buying existing construction.

In fact, many participating FHA lenders won’t allow you to use down payment assistance for a construction loan. The thinking here is that if you struggle with a down payment, you may not be right for the One-Time Close program; it can be more expensive than purchasing an equivalent existing home.

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