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Although recently increased in 2009, the Federal Housing Administration still beats most other lending options with a low down payment requirement of only 3.5%. And unlike subprime mortgages of the past, FHA home loans require income documentation, higher underwriting standards, and insurance premiums paid by the borrower.

FHA Home Loan: What Is the Down Payment Requirement?

FHA Home Loans And The 3.5% Down Payment

Since the beginning of 2009, the latest update to the Federal Housing Administration requires borrowers to bring a down payment of at least 3.5%. Compared to other conventional home loans offered by Fannie Mae and Freddie Mac for example, FHA home loans have become quite popular due to their relatively low down payment requirements.

Most importantly, the difference between FHA and most other mortgage lending options is that borrowers do not have to pay a substantially higher rate of interest due to a higher loan to value ratio. Compared to FHA home loans, conventional loans could increase rates by a full percentage point if a borrower's loan to value ratio exceeds a specified limit; in many cases, higher loan to value ratios can actually be enough to completely disqualify a mortgage applicant altogether.

Low Down Payment Requirements, But Still Different Than Subprime

While many often associate low down payment requirements with the subprime lending of the past, FHA home loans are really structured quite differently. For starters, the main difference is that everything is fully documented with a FHA home loan. FHA mortgage lenders approved by HUD must verify employment, document income, and review assets and savings. Immediately, this filters out the subprime borrowers looking for fast or cheap loans with minimal documentation.

Furthermore, the FHA program is really more like an insurance plan instead of a simple mortgage lending institution. In fact, the FHA never actually lends money; they simply insure the mortgages originated by their approved lenders. Moreover, the entire FHA program is made possible by the insurance premiums paid by the borrowers themselves. For most FHA mortgages, borrowers will pay an upfront mortgage insurance premium (MIP) of 1.75% of the loan balance at closing, and an annual (MIP) of .55% every month.

So even though the FHA is a government program, it is primarily funded by the borrowers who make use of FHA instead of relying on taxpayer's dollars. For many applicants, mortgage lenders will be able to demonstrate that FHA home loans are still a great deal even with the added insurance premiums.

Heindrick So
Heindrick So is a mortgage consultant at a local Bay Area Real Estate Brokerage--specializing in residential wholesale lending. Heindrick frequently contributes to various finance columns, ranging from home loans and mortgages, debt management, and other personal finance topics.