One of the biggest draws of a Federal Housing Administration loan is the low down-payment requirement. Most borrowers put down only 3.5 percent of the purchase price. However, the down payment needed on an FHA loan depends on the borrower's and the property's qualifications. For example, borrowers with bad credit or new constructions have higher down payment requirements. In exchange for a relatively low down payment, the FHA charges borrowers a mortgage insurance premium, which adds to the monthly payment. This insurance protects the lender in the event of default.
Loan-to-Value and Down Payments
FHA lenders use loan-to-value ratios to determine down payment amount. Loan-to-value measures the loan balance relative to a home's value -- represented as a percentage. FHA loans are unique because they allow for a high LTV -- 96.5 percent. Conventional loans typically have LTV limits of 80, 90 and 95 percent. Subtracting the LTV factor from 100 percent determines a loan's down payment. For example, 100 percent minus 96.5 percent results in a down payment of 3.5 percent.
Credit Affects Down Payment Requirements
Borrowers with bad credit may have to make higher down payments. The FHA allows credit scores down to 500. Borrowers with scores above 580 qualify for the minimum down payment of 3.5 percent and borrowers with less than 580 must put down 10 percent. The FHA sets minimum guidelines for down payments, however, individual lenders may impose stricter rules, known as overlays. Common lender overlays include a minimum credit score of 620, regardless of down payment amount; or a 10-percent down payment for borrowers with scores between 580 and 619.
Higher Down Payment for New Construction
An increased down payment lowers the FHA lender's risk. The FHA requires a higher down payment for proposed home construction, a home under construction or a newly built home less than one year old. These purchases require at least 10 percent down. However, a borrower may qualify for the FHA's minimum down payment of 3.5 percent if the construction project meets certain requirements, such as site plans were approved by an FHA underwriter, a building permit and certificate of occupancy was issued by the local jurisdiction, or the buyer receives a 10-year builder's warranty.
Why You Might Pay More
Your lender may require an increased down payment if the home's appraised value is less than the purchase price. An FHA appraisal report provides the lender with a professional opinion of value based on comparable sales in the area and the home's condition. Should the appraised value come in low and you still want to purchase the home at the previously agreed upon price, you must pay the difference between 96.5 percent of the appraised value and the purchase price.