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5 Ways to Come Up With Your FHA Loan Down Payment

FHA loan down payment

Loans guaranteed by the Federal Housing Administration, aka FHA loans, require that borrowers with at least a 580 credit score contribute a minimum 3.5% down payment. So, if you’re after a $200,000 home, you need $7,000 in down payment money.

The good thing is you’re not limited to digging into your own pockets to come up with the cash. You can use a gift or grant from a close friend, relative, employer, government agency or charitable organization. You can borrow against your retirement account. You can sell your baseball card collection or assortment of high-end handbags.

Keep reading for more ideas on how to satisfy the down payment requirement for FHA loans.

5 ways to come up with your FHA mortgage down payment

Consider the following five strategies to gather funds for your FHA mortgage down payment.

Apply for down payment assistance

Check with the housing finance agency in your state to inquire about what down payment assistance programs are available and determine your eligibility. Assistance could potentially come in the form of a grant or a forgivable loan. You can find contact information for your state’s housing finance agency by visiting the National Council of State Housing Agencies’ website.

The Georgia Dream Homeownership Program, for example, provides eligible homebuyers with $5,000 in assistance to help cover their down payment. Borrowers are required to contribute at least $1,000 to the purchase and complete a homebuyer education course.

The amount goes up to $7,500 for those who are public servants, educators, active military, health care professionals or have a family member living with a disability.

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Take advantage of gift money

You’re allowed to use money gifted to you from a family member, close friend, charitable organization and a few other sources to cover the down payment for your FHA loan.

Check out our explainer on how parents can help their adult kids with a home purchase for more guidance.

According to the U.S. Department of Housing and Urban Development (HUD), of which the FHA is a subsidiary, when someone gifts you money toward your home purchase, there can be no expectation that you will repay those funds.

A homebuilder, home seller or real estate agent cannot provide gift funds for a down payment, because those entities directly benefit from the home purchase.

Withdraw from Roth or traditional IRA

You shouldn’t consider it as a first option, but you can withdraw money from a Roth or traditional individual retirement account (IRA) to help you come up with your down payment.

In many cases, income taxes and a 10% penalty apply to early withdrawals from an IRA (withdrawals by taxpayers who are younger than age 59 ½). That’s because the IRS wants to discourage taxpayers from prematurely using money that has been earmarked for retirement.

However, qualified first-time homebuyers can withdraw up to $10,000 — without paying the extra 10% penalty — for the purpose of buying, building or rebuilding a home, according to the IRS. You will still be subject to regular income taxes on the amount you withdraw when you file your tax return, however.

It’s possible to avoid paying income taxes on a withdrawal from a Roth IRA specifically, if you wait five years after opening your account before withdrawing the money for your down payment.

Borrow from 401(k)

There’s not as much leniency for 401(k) plan withdrawals; they are subject to income taxes as well as a 10% early withdrawal penalty. You may be able to borrow from your plan for a mortgage down payment, however.

The IRS allows qualified 401(k) plans to provide loans to plan participants at their discretion. The maximum loan amount is either 50% of the vested account balance or $50,000, whichever is lower.

Although most 401(k) loans have to be repaid within five years, loans used to purchase a primary residence usually have a longer repayment period. Remember: This is a loan, so you have to account for interest expenses as you repay the money.

Hold on to windfalls

Whenever you’re graced with some unexpected money, why not set it aside and dedicate to your down payment? If you stash away every bonus, income tax refund and potential inheritance amount, you’ll be surprised by how much those funds add up over time.

Along with saving windfalls, be sure you’re contributing to your savings account on a regular basis. If you can’t be trusted to save on your own, automate your savings through your financial institution, set up a specific amount of your paycheck to be deposited into your savings account directly, or try both.

The bottom line

There’s help out there to get you to your desired down payment amount for your FHA loan — you may just have to get creative while sourcing the funds you need.

Still, don’t get so caught up on your down payment issues that you forget what else you should be considering before getting an FHA loan. Check out our FAQ on FHA loans for more guidance.


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