What is the key to low down payment FHA loans? The answer might surprise you, especially if you’re a first time home buyer. Getting a mortgage loan means (in most cases) that the borrower must budget and save for a down payment, but the amount of that down payment can vary quite a bit depending on the lender.

For conventional loans you may find down payment requirements between five and 20 percent. But with FHA home loans, that amount can be as low as 3.5% of the adjusted value of the property. For FHA loan applicants who have FICO scores that may be considered “marginal”, that down payment requirement may be adjusted to 10%.

Why the higher down payment? FICO scores. Believe it or not, your credit rating can be an influence on the amount of money you’re required to pay up front at closing time in the form of your down payment.

FHA Loan FICO Score Requirements

HUD 4000.1, the FHA loan handbook, states that borrowers with FICO scores between 500 and 579 are technically eligible for an FHA loan at the higher down payment requirement. Those with FICO scores 580 or higher will technically qualify for the lowest minimum required investment or down payment which is set at 3.5%.

Lender FICO Score Requirements For FHA Loans

Your lender may have higher FICO score requirements that exceed FHA loan minimums mentioned above. In fact, you’ll find many lenders require credit scores in the mid 600 range, and for those who may not be able to meet that standard at loan application time a higher down payment could be a contributing factor in getting your loan approved.

Advantages To Paying More Down?

Your down payment is considered a form of “insurance” against loan default, in the sense that you have made an investment in the home by putting money down. In theory it’s harder to walk away from your financial commitment when you’ve invested a significant amount of money up front in the form of your down payment.

But paying more money down has advantages beyond this-the overall amount of the sum you borrow to buy the home is lower, reducing the cost of your mortgage loan over its’ lifetime.

It’s true that making a larger down payment can be financially challenging, but for those who start saving early, the bigger down payment can help.

A larger budget for your down payment requirements can also help in the event you decide to make only the minimum payment down. In such cases you could use the leftover cash to pay for other expenses related to your new mortgage.