FHA Loans and Down Payment Assistance: Making Homebuying Affordable

First-time homebuyers have a big hurdle to clear to get their foot in the door of a home of their very own, and buyers in that situation likely have heard that there’s assistance available to help them reach their goal. The Federal Housing Administration (also known as the FHA) is an agency of the U.S. Department of Housing and Urban Development (HUD) that offers first-time buyer support.

The FHA doesn’t lend money itself. Instead, it insures mortgages made by lenders. The FHA backing lets lenders offer easier credit terms than non-FHA loans.

FHA loans are especially important for first-time buyers. Based on data from a recent U.S. Census report, it’s estimated that more than 10% of all home loans were FHA-backed. More than 80% of those FHA borrowers were first-time homebuyers. First-time borrowers like FHA loans because they are easier to qualify for and let borrowers make lower down payments than some other financing options.

“You don’t have to be a first-time homebuyer to take advantage of FHA,” says Richie Helali, a HomeLight mortgage specialist. “But FHA guidelines are a little more relaxed. If somebody’s credit isn’t strong enough, they may not qualify for another loan. But there’s a chance they’ll qualify for an FHA loan.”

What are down payment assistance programs for FHA loans?

There are literally thousands of down payment assistance programs. Many are small, local operations restricted to a single city or county. All of them have different rules and requirements.

But what down payment assistance programs do is incredibly valuable. They give or loan homebuyers money for their down payments, one of the biggest expenses when buying a house. This helps remove one of the biggest obstacles to homeownership.

And while not every lender works with down payment assistance programs, and some may restrict the amount of the down payment that can come from down payment assistance, FHA loans will allow buyers to use down payment assistance for the entire down payment.

That means if you qualify for an FHA loan and can get into a down payment assistance program, you may be able to move into your new home without having to put a penny into the down payment.

“It’s free money — it’s literally free money,” Helali says of certain types of down payment assistance, such as grants.

Anybody who spends a significant amount of time shopping for a home will hear about FHA loans. Down payment assistance programs, by comparison, are treated like classified secrets. Often, neither lenders nor agents will tell borrowers about the programs. As a result, while as many as 87% of single-family homes may potentially qualify for down payment assistance, just 15% of borrowers apply for assistance.

The National Association of Realtors (NAR) reported that down payments increased last year for both first-time and repeat homebuyers. First-time buyers likely faced the need for stronger offers compared to all-cash buyers, while repeat buyers benefited from increased housing equity. The typical down payment for first-time buyers was 8%.