Before you can make an offer on a home, you have to get preapproved for financing - unless you are paying all cash for the property. If this is your first home and your first experience with the loan process, you probably have a lot of questions. Meeting with a loan officer will give you some idea of whether or not you are in a position to make an offer on the house of your dreams. 

Most first time home buyers will have to decide between a conventional mortgage and one insured by the Federal Housing Administration. There are pros and cons when it comes to which to choose. For instance, it’s easier to qualify for an FHA loan, but you won’t need quite as much for the downpayment if you can qualify for a conventional loan. 

Another consideration is mortgage insurance. You are going to pay mortgage insurance no matter how much money you pay down if you go with an FHA loan. If you can make a 20% downpayment, which is way out of reach for the majority of first time home buyers, you won’t have to pay mortgage insurance on a conventional loan.

Many first time buyers opt for an FHA loan because there are fewer requirements to qualify. The FHA downpayment rules include a credit score of 580 to qualify for a 96.5% loan. That means you will need to make a minimum downpayment of 3.5%. You can still get a loan with a lower credit score, but you’ll have to come up with a 10% downpayment to qualify for a 90% loan.

The Federal Housing Administration (FHA) is overseen by the Department of Housing and Urban Development (HUD). This means HUD decides what the FHA downpayment rules are. If you are interested in learning about all the nuts and bolts when it comes to FHA loans, you will find them in the HUD Handbook, also known as Single Family Housing Policy Handbook.

You will find the handbook states the minimum downpayment requirement to qualify for an FHA loan is currently 3.5% of the adjusted value. Adjusted value means the property appraised value or the purchase price minus any adjustments made to induce you to purchase, whichever is less.

The meaning of loan to value
You will hear the term “ loan to value” during the mortgage approval process. Loan to value is the amount of money you are borrowing to purchase the home. For instance, if you make a 10% downpayment, your loan to value will be 90%. If you make a 3.5% downpayment, your loan to value is 96.5%. 96.5% is the maximum loan to value allowed by HUD.

Downpayments and credit scores
Once again HUD determines what the FHA downpayment rules are. The handbook states a borrower must have a minimum credit score of 580 to qualify for a 96.5% loan with 3.5% down. Borrowers with credit scores between 500 and 579 have to come up with at least 10% as a downpayment to be approved for a 90% loan. If your credit score is less than 500, you will not qualify for an FHA loan. In this case, your best idea is to work on improving your score before trying to purchase a home.

Help with the downpayment
There is good news for borrowers short on cash for their down payments. According to the 2019 FHA guidelines, family members, friends, and other sources who have been approved can donate money to help you meet your down payment obligation. This donation is not the same as a loan. The money must be given freely as a gift with no expectation of repayment. Interested parties, which include the seller, a builder, or the real estate agent, are not allowed to contribute to your down payment as an inducement to purchase. 

Another source for down payment money can come from grants. These are most often available through housing agencies at the state, county, and local levels. You can do an online search by entering down payment assistance, then your city, county, and state to find out what is available. 

The FHA research library is a great source of information with articles and tutorials to help you understand the mortgage process.