203(k) Loan Down Payment Requirements
Down payments are a major part of the home purchase process. It’s a huge chunk of money to come up with for would-be homeowners, but it is the single most important thing (other than your credit score) in determining your interest rate.
With the 203(k) loan, you’re allowed to put down as little as 3.5% of the home’s purchase price, but getting closer to 20% is always a better decision. Of course, that doesn’t mean that it’s possible. Many aspiring homeowners have very little in the way of savings, and 3.5% of a home’s purchase price may actually be far more than what you have on hand.
The good news is that there are numerous ways you can make a down payment with FHA loans – they’re much less restrictive than conventional loans. Obviously, you can use your own money for this without a problem, but you can also source the funds for a down payment as a gift from someone else. This could be:
A family member
An employer (as a bonus)
What’s more, you will not have to jump through the same hoops with an FHA loan as you would with a conventional loan if you do use gifted money. For instance, with a conventional loan, the lender (actually the lender’s underwriter) will need to establish a paper trail that proves you had a right to the gifted money, that the gift did not monetarily harm the giver, and that the money was legally obtained. You will also need to allow the money to season, which basically means it needs to sit in a bank account for at least 60 days.
With an FHA loan, you can use gift money free and clear in most cases, without having to worry that your gifted cash has not had time to season, or that you cannot provide all the paper trail-related documentation the underwriter demands.
There are also other options for down payments, including grants. In addition, while the seller of the home cannot help pay your down payment, they can help pay up to 6% of the property’s sale price in eligible closing costs. To learn more, check out our FAQ on 203(k) seller contributions.
Grants vs. Loans
In most cases, a lender will not allow you to take out a loan to use as a down payment. The reason for this is simple – loans must be repaid. So, taking out a loan to fund your down payment means that you are going deeper into debt, and that you will need to make monthly payments to that lender as well as payments to your mortgage lender.
That increases risk and decreases your financial capabilities. It’s just not good business. Grants are different, though.
Grants are essentially free money. There is no need to repay these funds, which means that you can use them to make your down payment and your lender will not have a problem with it, as long as you can prove that the money came from a grant and not from a loan.
Down Payment Grant Options Approved by the FHA
In most states, there are grants available to aspiring homeowners who qualify for them designed to help make homeownership an attainable reality. Each state, and even each county within a state, has their own selection of grants, as well as their own requirements that you will need to meet.
For instance, one state might require that you attend a home buying workshop before being awarded a grant, and another after receiving the grant and purchasing your home. Another will require that you not earn more than a specific amount per year, and put very stringent requirements on the types of real estate that you can purchase. All of these requirements are in place to ensure that grant money goes to those who need it most.
You can start researching your state-specific grant options with HUD’s state funding page.