FHA Loan Minimum Down Payment Requirements and Acceptable Sources

This guide explains the minimum down payment requirement for an FHA loan, acceptable sources of down payment funds, the ability to use gift money, and everything else a home buyer needs to know.

And here are 5 things you should know right off the bat:

1. FHA loans require a minimum down payment of 3.5%
2. You need a credit score of at least 580 to qualify for this
3. Borrowers with lower credit scores have to put at least 10% down
4. The money can be provided as a gift from an approved donor
5. The seller cannot contribute money to your minimum investment

Minimum Down Payment for FHA Loans 3.5%

The Federal Housing Administration (FHA) is part of the Department of Housing and Urban Development (HUD). So the down payment rules and requirements for FHA loans are handed down from HUD, and enforced by the Federal Housing Administration.

All of these requirements can be found in HUD Handbook 4000.1 (a.k.a., Single Family Housing Policy Handbook). The official handbook for FHA loans refers to the down payment as a “Minimum Required Investment” or MRI. Keep that in mind going forward.

Here’s what it says about the MRI:

“In order for FHA to insure this maximum mortgage amount, the Borrower must make a Minimum Required Investment (MRI) of at least 3.5 percent of the Adjusted Value.”

HUD later defines the “adjusted value” in the following way:

“For purchase transactions, the Adjusted Value is the lesser of: purchase price less any inducements to purchase; or the Property Value.”

If we combine these quotes, we have a clear explanation for the minimum down payment requirements for an FHA loan. A borrower who uses this program to buy a house must make a down payment of at least 3.5% of the purchase price or the appraised value.

Related article: Should you ever put 20% down?

How to Calculate the Down Payment

The math here is fairly simple. To calculate the minimum down payment for an FHA loan, you would simply multiply either the purchase price or the appraised value by 3.5%. But first you must convert the percentage to a decimal, which comes to .035 in this case.

For example, if I’m buying a house for \$500,000, I would multiply that number by .035 to figure out the minimum down payment amount.

Here’s the math: (500,000 x .035 = 17,500)

In this example, I would be required to put down at least \$17,500 on my home purchase, when using the FHA loan program to buy a house.

Here’s what the minimum investment would be for different home prices:

No Such Thing as a Zero-Down FHA Loan

We have received questions in the past relating to a “zero down” FHA loan option. Some borrowers believe that an FHA loan can finance 100% of the home purchase price, eliminating the need for a down payment altogether.

To clarify: There is no such thing as a zero-down FHA mortgage loan.

That’s because this program limits the loan-to-value (LTV) to a maximum of 96.5%. As it states in the official HUD handbook: “For purchase transactions, the maximum LTV is 96.5 percent of the Adjusted Value.”

This means the base loan amount cannot exceed 96.5% of the home purchase price or appraised value. A zero-down-payment mortgage option (where the home buyer finances 100% of the purchase price) would result in an LTV of 100%.

All home buyers who use this program must make an investment of at least 3.5%.

You’ll Also Need A Credit Score of 580 or Higher

Your credit score can also influence your down payment requirement, when using an FHA loan to buy a house. To qualify for the minimum 3.5% investment mentioned above, you will need a “Minimum Decision Credit Score” of 580 or higher.

In this context, the Minimum Decision Credit Score (MDCS) is the middle score when three scores are reported, or the lower number when only two scores are reported.

The table below shows the relationship between credit scores and FHA loan down payment requirements, according to the official HUD handbook:

Borrowers with credit scores below 500 are not eligible for the FHA loan program.

Bottom line: With a score of 580 or higher, you could make a minimum down payment as low as 3.5% for an FHA loan. If your score falls between 500 and 579, you’ll have to invest at least 10% (which removes one of the benefits of this program).

Acceptable Sources of Funds

The good news is that the Federal Housing Administration allows home buyers to use a variety of down payment sources, including gift money.

Here are some of the acceptable sources of funds according to HUD:

• Checking and savings accounts
• Cash saved at home
• Retirement accounts (up to a certain limit)
• Stocks and bonds
• Private savings clubs
• Down payment assistance programs
• Gift money from an approved donor

These are not the only acceptable sources for FHA down payment funds. Depending on the situation, other funding sources may be allowed as well. These are just some of the most common types of funds that are allowed by HUD.

Most of these down payment sources are self-explanatory. But the gift money option warrants some additional clarification, because it’s a major benefit for borrowers.

Using Gift Money From a Third-Party Donor

FHA down payment guidelines allow borrowers to use money gifted from an approved third-party donor.

In this context, a “down payment gift” occurs when a person who is related to or associated with the borrower provides money to help the borrower cover their minimum required investment.

For example, a young couple buying their first home with an FHA loan could use money from one of their parents to help cover the 3.5% minimum down payment requirement.

Here are the general guidelines for using gift money:

1. It must come from an approved source.

According to HUD, FHA borrowers can use gift money provided by a family member, an employer or labor union, a close friend, a charitable organization, or a governmental agency or public entity that provides homeownership assistance to low- or moderate-income families or first-time buyers.

2. It must be a bona fide gift.

There can’t be any expectation of repayment from the borrower. The down payment funds being gifted must truly be a gift, with no strings attached. It cannot be an interpersonal loan.

3. The donor must provide a signed letter.

The person providing the funds also has to provide a signed written statement that (A) confirms the gift amount, (B) explains their relationship to the borrower, and (C) affirms that they do not expect any form of repayment.

Bottom line: The FHA requires a down payment of at least 3.5%. But those funds don’t necessarily have to come out of the borrower’s pocket. You could obtain gift funds from an approved source to cover some, or even all, of the minimum required investment.

FHA vs. Conventional Down Payments

There’s a widespread notion that FHA loans offer a lower down payment when compared to conventional home loans.

But this only partly true.

The full truth is that a standard conventional loan for home buyers typically requires at least 5% down, and sometimes more. But some conventional loan programs allow borrowers to make a down payment as low as 3% of the appraised value.

These conventional 3% options are often limited to first-time buyers, or those who haven’t owned a home within the past few years. They also require the borrower to complete an approved home buying education course, in order to qualify.

Here’s an example:

Fannie Mae, one of the two government-sponsored enterprises that purchase loans from lenders, says that it “offers 97% loan-to-value (LTV) … financing to help creditworthy home buyers who would otherwise qualify for a mortgage but may not have the resources for a larger down payment.”

That’s just one example of a conventional loan programs with a 3% down payment requirement. Freddie Mac (the other government-sponsored enterprise) has a similar product called “Home Possible.”

But aside from these specialty programs, a regular conventional loan might require at least 5% down, and up to 20% for a larger-than-average “jumbo” mortgage amount.

Bottom line: The minimum down payment requirement for an FHA loan is 3.5%, period. The minimum for a conventional mortgage product can range from 3% to 20%, depending on the loan size and other parameters. Home buyers should explore all of their options.

The Seller Cannot Pay For It

The Federal Housing Administration prohibits the seller from contributing money to the home buyer’s minimum required investment, or MRI.

We stress this point because the seller is allowed to contribute to the buyer’s closing costs (if they choose to). But the person selling the property cannot contribute to the home buyer’s down payment, when an FHA loan is being used.

As the HUD Handbook 4000.1 states: “Interested Party Contributions may not be used for the Borrower’s MRI.”

The Department of Housing and Urban Development defines interested parties as “sellers, real estate agents, builders, developers or other parties with an interest in the transaction.”

How Down Payment Assistance Works

Down payment assistance occurs when a government agency or non-profit organization provides support to help a home buyer cover their down payment expense. It usually comes in the form of a grant, a low-interest or forgivable loan, or a deferred-payment loan.

While the FHA does not provide down payment assistance directly to borrower, they do allow home buyers to use these programs as a source of funds. In fact, the HUD.gov website offers a list of programs available in different states.

Disclaimer: This article explains the minimum down payment requirements for FHA loans, based on official guidance from the Department of Housing and Urban Development. The mortgage process can vary from one borrower to the next, so portions of this guide might not apply to your situation. If you have questions about this program, check out the “FHA Research Center” for contact information and other resources.

Brandon Cornett

Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author