How an FHA Lender Sizes the Down Payment on Your Purchase

The Quick Read: The lender does not simply take 3.5% of your price. It takes 3.5% of the “adjusted value,” which is the lower of your contract price or the appraised value, after any deductions for extra seller credits. Your credit score and the way the deal is structured can change the percentage. A low appraisal can raise the cash you need.

Key Terms Defined

Adjusted value. The lesser of the sales price and the appraised value, after subtracting certain seller inducements. The lender sizes the loan from this number.

Minimum required investment. FHA’s formal name for your down payment. It must come from your own cash, an approved gift, or approved assistance, and it is at least 3.5% on a maximum-financing loan.

Base loan amount. The loan before the upfront mortgage insurance premium is added. It is the maximum loan-to-value percentage multiplied by the adjusted value.

Loan-to-value (LTV). The loan as a percentage of the home’s value. A 96.5% LTV means the down payment covers the other 3.5%. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.

Upfront mortgage insurance premium. A one-time FHA insurance charge of 1.75% of the base loan. Most buyers finance it into the loan.

Inducement to purchase. Seller or other interested-party money above what the rules allow. The lender subtracts it from the price before sizing the loan.

Cash to close. Everything you bring to the table: the down payment, borrower-paid closing costs, and prepaid items, minus credits and any earnest money already paid.

The Lender’s Sizing Sequence, Step by Step

An FHA lender sizes your down payment in a fixed order. It finds the adjusted value, applies the right LTV, calculates the base loan, and treats the remainder as your required investment. Each step can move the final number, so the order matters.

Across the wholesale lenders Lendmire works with, every FHA purchase file runs the same chain. Here it is.

1. Find the adjusted value. The lender compares your contract price to the appraisal. If the appraisal meets or beats the price, the price is used. If the appraisal is lower, the appraisal is used.

2. Subtract inducements. Seller or interested-party money above the allowed limit reduces the price, dollar for dollar, before any percentage is applied.

3. Set the LTV tier. With a decision score of 580 or higher, the cap is 96.5% on a purchase. FHA’s own rulebook has a lower tier, 500 to 579, which limits financing to 90% and means a 10% down payment. The wholesale programs Lendmire places FHA loans with start at 580, so that lower tier is a lender policy choice rather than an FHA requirement.

4. Check the overlays. Occupancy, family-sale status and a non-occupant co-borrower can each lower the cap. The lowest applicable cap wins.

5. Calculate the base loan. Multiply the LTV by the adjusted value. What remains is your minimum required investment.

6. Add the upfront premium. The 1.75% premium is calculated on the base loan and usually financed. It sits on top of the base loan, so the final loan lands a bit over 98% of the adjusted value at maximum financing.

7. Verify the money. The lender wants to see where the down payment came from, with bank statements and, for gifts, a signed letter.

One note on ratios, since they sit beside the down payment. The base debt-to-income pair is 31/43 (housing cost and total debt, as percentages of income) with no compensating factors. Documented factors can stretch that toward 40/50 at the top tier. The automated underwriting finding governs most files.

You can see the full program picture on Lendmire’s FHA loan programs page. What follows is the mechanics behind the headline number.

A Worked Example in Percentages

Here are two versions of the same purchase, shown as percentages of the contract price. These are modeled inputs, not market data.

Read the last row carefully. The appraisal came in only 3% under the price. Your cash toward the price nearly doubled.

Why? You still owe the seller the full contract price. The loan shrinks because it is sized from the lower value. Your cash fills the gap.

The upfront premium then adds to the base loan in either column. Closing costs sit outside this table, which is the next point.

What Happens When the Appraisal Misses?

A low appraisal shrinks the adjusted value, which shrinks the loan and raises your required cash. The lender cannot finance the gap. The contract price stays the same unless you and the seller change it.

Buyers in this spot usually have four moves:

• Ask the seller to lower the price to the appraised value.
• Split the difference, with the seller dropping the price and you adding cash.
• Cover the gap with your own cash.
• Walk away, if your contract allows it.

Which fits you? Start with your cash reserves, not your pride. If paying the gap leaves you with almost nothing after closing, renegotiating beats stretching. If you love the house and have cushion, covering a small gap can be reasonable.

Honestly, this is a toss-up in many files. A small gap on a home you plan to keep for years often feels different than a large gap on a stretch purchase. Ask your loan officer to rerun the numbers on each path.

What if the appraisal comes in higher? The lender still uses the price. You do not get a smaller down payment because the home appraised high. Nice for equity. Not for your cash.

Do Seller Credits Change the Number?

Yes, but only past a limit. Seller money can pay certain closing costs, up to 6% of the sales price, and cannot fund your down payment. Anything above the allowed amount reduces the price the lender uses.

The HUD FHA Resource Center states that interested-party contributions may not be used for the borrower’s minimum required investment. It also explains that excess contributions are inducements that reduce the price dollar for dollar before the LTV is applied.

Say a seller offers credits worth 8% of the price. Only 6% fits under the limit. The extra 2% comes off the price used for sizing. With an appraisal at or above the contract price, the adjusted value falls to about 98% of the price. The base loan becomes about 94.6% of the contract price, and your cash toward the price rises to roughly 5.4%.

That is not a trap. It just means a big credit is not free money. The lender recalculates, and the loan shrinks.

What counts toward the 6%? Closing costs, buydown arrangements, the upfront insurance premium and similar items. Agent commissions the seller normally pays are typically not counted as an interested-party contribution. Credits funded by the lender through premium pricing sit outside the cap, as long as the party is not the seller, agent, builder or developer.

Where the Down Payment Money Can Come From

Your required investment can come from your own savings, an approved gift, or approved assistance. The lender must document the source. A big deposit with no paper trail is a problem.

The gift rules are specific. FHA’s gift FAQ says the lender must obtain a gift letter signed and dated by the donor and the borrower. The letter names the donor, the relationship, and the dollar amount, and states that no repayment is required. It also says only family members may provide equity as a gift when the property is sold to a family member.

Donors on FHA’s list include family members, employers, close friends with a clearly documented interest, charitable organizations, and government agencies. A letter alone is not enough. Lenders also trace the transfer, which is standard underwriting practice.

Gifts get their own deep dive in Lendmire’s piece Can a Whole FHA Loan Down Payment Be a Gift?.

Earnest money works the same way. The lender wants to see it leave your account and land with the escrow holder. If it came from a gift, the gift rules apply to it too.

Down Payment vs. Cash to Close

The down payment is only one slice of what you bring. The official FHA language separates the minimum required investment from the total required investment, which adds your own closing costs. You cannot finance the required investment. You can finance the upfront premium.

The CFPB explains that FHA mortgage insurance is required on every FHA loan. It has an upfront piece and a monthly piece, and rolling the upfront fee into the loan raises the balance and the overall cost.

The monthly piece is the annual premium. It runs between 0.15% and 0.75% of the balance, depending on term, loan amount and LTV. Here is where the down payment matters twice. On a thirty-year loan above 90% LTV, the annual premium lasts the term of the loan. At or below 90% LTV, it ends after eleven years. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.

So a bigger down payment can do more than shrink the loan. Crossing the 10% mark changes how long the premium lasts. If you are near that line, it is worth asking your loan officer to compare both versions.

Where the General Rule Breaks

The 3.5% figure is a starting point. A handful of situations change the math. The official source is Handbook 4000.1, the rulebook FHA lenders follow. Several of these points sit in its LTV and asset sections.

Lower credit scores. Under FHA’s own rules, a score from 500 to 579 limits financing to 90%. Many buyers assume 3.5% is flat. It is not. Because the wholesale programs Lendmire places loans with start at 580, buyers below that line usually need to rebuild first. Borrowers with thin or non-traditional credit can still reach maximum financing, but the file is manually underwritten.

Non-occupant co-borrowers. A co-borrower who will not live in the home is allowed. But the maximum LTV for a non-occupant file starts much lower than 96.5%. It can climb back toward maximum financing when the borrowers are family members, with exceptions for family-to-family sales and for two- to four-unit homes. Ask before you add a co-signer. The cap changes more than most people expect.

Buying from family or a business partner. FHA calls these identity-of-interest sales, and they carry a lower LTV restriction by default. Exceptions apply, such as buying a family member’s principal residence, or buying a home you have rented from a relative with written proof of tenancy beforehand. The details are in the handbook, and your file decides which applies.

Government second liens. Secondary financing from governmental entities can help meet the required investment. Other secondary financing is more restricted and cannot generate cash back to you.

Occupancy. FHA purchase loans are for the home you will live in, one to four units. Investment properties and vacation homes do not qualify. If you are buying a multi-unit and living in one unit, the same LTV logic applies.

County loan limits. FHA limits vary by county and change every year. Check your county’s current limit on HUD’s lookup tool before you fall in love with a price.

How to Estimate Your Own Number

You can rough out your down payment with five steps. Use real figures from your contract and appraisal.

1. Write down the contract price and, once you have it, the appraised value. 2. Take the lower one. Subtract any seller credit above the allowed limit. That is your adjusted value. 3. Multiply by 96.5% for a rough base loan at a 580-plus decision score. 4. Subtract the base loan from the adjusted value. That is your minimum required investment. 5. Add the gap between the contract price and adjusted value if the appraisal was low. Then add closing costs and prepaids, and subtract seller credits you are allowed to use.

Then ask your loan officer these:

• What decision score is the file using?
• Does any overlay lower the LTV cap on my file?
• If the appraisal comes in low, what changes?
• How will my gift funds be documented?
• At what down payment does my annual premium change?

The CFPB’s Your Home Loan Toolkit frames FHA’s 3.5% option as one path for buyers who cannot put down more. The point is not to put down the least. The point is to know the true number before you shop.

Here is what the pattern looks like on real files. The number on the first estimate often moves. Appraisals, seller credits, and sourcing questions on large deposits are the usual reasons. Buyers who set aside a cushion beyond the minimum handle those moves calmly. Buyers who budgeted to the penny do not. Everything here is subject to lender guidelines and full file review.

Next Step

If you are buying a home and want to see whether an FHA loan fits your file, Lendmire can help you compare the options and what each one asks of the file. Reach the team at 828-256-2183 or use the quote form. Whatever you choose, treat the appraisal as the one number on the page you cannot negotiate with.

About Lendmire

Lendmire (NMLS# 2371349) is a mortgage brokerage serving homeowners and home buyers in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. HUD FHA Resource Center: Interested party contributions

2. HUD FHA Resource Center: Gifts of equity

3. CFPB

4. HUD Housing Handbooks (Handbook 4000.1 portal)

5. CFPB: Your Home Loan Toolkit