FHA Mortgages do not require a 3.5% Down Payment, they require a 3.5% Contribution.

It is often touted and understood that FHA Mortgages require a 3.5% down payment.

Is this true?

Well, kind of.

FHA mortgage do require 3.5% from the borrower side of the transaction but it doesn’t have to be all down payment. Technically, the FHA requires a minimum of a 3.5% Contribution from the borrower. This Contribution doesn’t have to be all down payment.

Let’s review…

When buying a house, there are items that a buyer pays for prior to closing.  There will always be an appraisal charge on an FHA purchase.  Appraisal charges can vary a little bit based on zip code, but we usually see these around $500 for a single family residence. Although not a mandatory part of an FHA approval, it is also common for a home buyer to elect to have a home inspection completed. A home inspection cost might be around $400. Other common charges might be a Pest Inspection to check for termites, carpenter ants, etc.  Unless evidence of a pest issue is noticed by the appraiser, a pest inspection is also optional but home buyers often elect to get these done as an extra precaution. Pest inspections usually run about $75. There are a few other inspections that a home buyer can elect to have such as radon, water, and roof but these are not super common, so for now let’s just use the common inspections to illustrate the point of this article. The other major item that a buyer opens their purse strings for prior to closing is the Earnest Money Deposit, often referred to a Hand Money. This is a deposit that the home buyer makes with the seller to show that they are committed to the transaction. If the buyer gets cold feet and tries to back out of the sale at the very last minute, the seller can often keep this deposit. The buyer has a window of time to complete their inspections and secure the mortgage approval before this hand money deposit becomes non-refundable. The hand money counts as money already put into the transaction by the buyer, it is therefore considered part of the 3.5% contribution.


Sales Price: $200,000

Items paid prior to closing

Appraisal: $500

Home Inspection: $400

Pest Inspection: $75

Hand Money Deposit: $3000

Total of items paid prior to closing: $3975

3.5% minimum required Contribution: $7000 (3.5% of 200K)

Remaining funds due at closing: $3025

The key to getting credit towards the 3.5% contribution is to be able to document that the items paid prior to closing were paid out of a checking account with a check or debit card. Items paid prior to closing with a credit card will not count towards this 3.5% contribution. This is an important distinction to note. Items paid by credit card are not counted towards the 3.5% because the FHA considers credit card debt as borrowed money.

In summation, yes, you do need 3.5% in the mix for an FHA purchase, but items you pay for outside of the down payment can count towards this figure.

FHAKeith LandisComment