How to Buy a Home With an FHA Loan Without Using Your Own Money for the Down Payment in Baldwin County, Alabama

By Tom Kalagher, Fairhope Mortgage | NMLS #2028566

Yes—many Baldwin County buyers can use FHA financing without supplying the 3.5% minimum required investment from their own bank account. A standard FHA loan still requires a minimum investment, but eligible gift funds, a family gift of equity, or approved down-payment assistance may cover it. Qualified disaster victims may use FHA Section 203(h), which provides 100% financing with no required down payment, although closing costs and prepaid expenses remain, but can sometimes be paid by the seller.

Using approximate lower-quartile prices rather than city medians, the examples below assume $400,000 in Fairhope, $255,000 in Daphne, $270,000 in Foley, and $305,000 in Gulf Shores. The corresponding 3.5% investments are $14,000, $8,925, $9,450, and $10,675. Approval still requires qualifying credit, income, debt ratios, an FHA-eligible property, and properly documented funds.

First-Time Home-Buyer Price Assumptions

FHA does not establish a “typical first-time home-buyer price.” For these examples, we use the approximate 25th percentile of recently tracked closed sales as a practical entry-level benchmark.

Sources: Fairhope market data, Daphne market data, Foley market data, and Gulf Shores market data.

These figures are planning examples, not appraisals or representations that homes will be available at these prices. A particular home’s value, condition, property type and FHA eligibility must be evaluated separately.

How Much Down Payment Does FHA Require?

For borrowers with a qualifying decision at the maximum FHA financing level, the minimum required investment is generally 3.5% of the adjusted value.

The basic calculation is:

Purchase price × 3.5% = minimum required investment

Review the current requirements in the FHA Single Family Housing Policy Handbook 4000.1. Because FHA mortgage limits change annually, confirm the applicable Baldwin County limit using HUD’s FHA Mortgage Limits Lookup Tool.

Estimated FHA Payments at Today’s Illustrative Rate

The following calculations use:

• 30-year fixed-rate mortgage

• Illustrative interest rate of 6.75%

• 1.75% upfront mortgage insurance premium financed into the loan

• Estimated annual mortgage insurance premium of 0.55%

• No discount points

The 6.75% assumption is for illustration and is close to current national FHA market readings. Rates can change daily and depend on credit, loan structure, points and lender pricing. See current mortgage-rate information.

These estimates do not include property taxes, homeowners insurance, flood insurance, HOA dues, condominium assessments or other housing expenses. Those costs can be substantial in coastal Baldwin County, particularly in Gulf Shores.

See HUD’s FHA mortgage-insurance guidance for applicable premium requirements.

Option 1: Use Gift Funds for the FHA Down Payment

An eligible donor may give the borrower the money needed for the minimum required investment. FHA generally permits gifts from sources such as:

• A family member

• The borrower’s employer or labor union

• A close friend with a clearly documented interest in the borrower

• A charitable organization

• A governmental agency or public entity assisting home buyers

A prohibited interested party generally cannot disguise a sales concession as a gift. The donor must also state that repayment is not expected.

Gift-fund examples

The lender will normally require a signed gift letter and documentation showing the transfer of funds from the donor to the borrower or settlement agent. Depending on the transfer method, that may include bank statements, a canceled check, wire confirmation, deposit evidence or the settlement statement.

Consult the Gifts and Source Requirements for the Borrower’s Minimum Required Investment sections of the current FHA Handbook 4000.1.

Option 2: Use a Gift of Equity From a Family Member

A gift of equity may be available when an eligible family member sells a home to the borrower and gives the borrower part of the seller’s equity.

For example, suppose a parent sells a Fairhope home to an adult child for $400,000. If the appraisal supports the transaction and all FHA requirements are met, the parent could provide a $14,000 gift of equity at closing. That equity could satisfy the child’s 3.5% minimum investment.

A gift of equity should be documented in the sales contract, gift letter, appraisal and closing documents. It is not simply the difference between an unsupported asking price and the contract price.

HUD specifically addresses this option in its gift-of-equity guidance and in Handbook 4000.1.

Option 3: Use Eligible Down-Payment Assistance

Down-payment assistance may be structured as:

• A grant that does not have to be repaid

• A forgivable second mortgage

• A deferred-payment second mortgage

• A repayable second mortgage

• Assistance from an eligible governmental agency, public entity, nonprofit organization, employer or other permitted source

Program availability, income limits, purchase-price limits, repayment provisions and funding levels vary. Some assistance programs may also impose stricter credit-score or debt-ratio requirements than FHA itself.

Assistance needed to cover the entire 3.5%

The lender must confirm that the provider, assistance terms and any secondary financing comply with FHA requirements. Funding availability should be confirmed before making an offer.

Option 4: FHA Section 203(h) After a Major Disaster

Section 203(h) is the correct FHA program for certain victims of Presidentially declared major disasters.

Qualified borrowers may receive 100% financing when their principal residence was located in a designated disaster area and was destroyed or damaged severely enough that replacement or reconstruction is necessary.

HUD states that:

• No down payment is required.

• The borrower may obtain 100% financing.

• The new property must generally be the borrower’s principal residence.

• The application must generally be submitted within one year of the disaster declaration.

• Closing costs and prepaid expenses still must be paid by the borrower, covered through permitted premium pricing, or paid through allowable seller contributions.

• The borrower must still qualify for the mortgage.

Read HUD’s official Section 203(h) Mortgage Insurance for Disaster Victims guidance.

Section 203(h) examples

At the illustrative 6.75% rate:

Taxes, homeowners insurance, flood insurance and HOA expenses are not included.

What About Closing Costs?

Eliminating the borrower’s personal down-payment contribution does not automatically eliminate closing costs.

For planning purposes only, assume closing costs and prepaid expenses equal approximately 3% of the purchase price:

The 3% figure is not a quote. Actual costs depend on insurance, taxes, title charges, discount points, inspections, escrow funding and the closing date.

Allowable seller contributions may pay eligible closing costs, prepaid expenses and discount points, generally subject to FHA’s applicable contribution limits. Seller credits do not replace the required down payment unless the transaction involves a properly documented and eligible gift of equity.

Frequently Asked Questions

Can a family member pay my entire FHA down payment?

Potentially, yes. An eligible family member’s properly documented gift may cover the full minimum required investment. The gift cannot require repayment.

Do gift funds have to remain in my account for 60 days?

Not necessarily. FHA focuses on properly documenting the donor, the source of the funds and the transfer. The exact documentation depends on when and how the money is transferred.

Can the home’s seller give me the down payment?

An ordinary seller credit cannot satisfy the minimum required investment. A qualifying family member selling the property may, however, be able to provide an eligible gift of equity.

Can down-payment assistance and gift funds be combined?

Potentially, yes. The lender must verify that each source is eligible and that the combined financing, assistance and property transaction comply with FHA rules and any assistance-program overlays.

Is FHA 203(h) available after every hurricane?

No. The residence must be connected to a Presidentially declared major disaster and meet HUD’s damage and eligibility requirements. The borrower must also apply within the applicable time limit.

Can I use these programs to purchase a Gulf Shores condominium?

Possibly, but the condominium unit must meet FHA eligibility requirements. Project approval, single-unit approval, owner occupancy, insurance, litigation, financial condition and other condominium factors may affect eligibility. HOA dues and assessments must also be included when qualifying the borrower.

Talk With a Local FHA Mortgage Professional

The best strategy depends on the borrower, the property, the donor or assistance provider, and the expected closing costs. Before writing an offer, obtain a complete FHA qualification and verify that the intended source of funds is acceptable.

Tom Kalagher
Fairhope Mortgage
Individual NMLS #2028566
Company NMLS #2561450
314 Magnolia Avenue, Suite 101
Fairhope, Alabama 36532
Phone: 251-391-5618
Website: Fairhope-Mortgage.com

This article is educational and is not a commitment to lend or a guarantee of approval. Interest rates, mortgage-insurance premiums, FHA limits, assistance-program funding and underwriting requirements can change. Equal Housing Opportunity.