How to Clear Higher FHA Hurdles with Help from a Money Market Account

If you've been saving up a down payment for an FHA mortgage, you probably already know that FHA mortgage terms just got tougher for anyone with a credit score below 580. If that's a setback for you, don't despair. With a disciplined savings program and a money market account, you could be back on track toward your goal in less than two years.

Better yet, here's your reward for waiting: in the long run, coming up with a larger down payment could save you thousands of dollars. Here's how to get started.

First, the bad news....

The bad news is that the upfront hurdle to buying a house with an FHA mortgage just got steeper. The upfront insurance premium for an FHA mortgage has been raised from 1.75% to 2.25%. Worse, if you have a credit score below 580, you will now need a 10% down payment to qualify for an FHA mortgage, rather than the 3.5% available to people with better credit scores.

If your credit score is below 580 and you had just about saved up enough for a 3.5% down payment and a 1.75% upfront insurance premium, you probably feel that the bar was just raised on you at the last minute. Still, if home ownership is still an important long-term goal for you, the only thing to do now is to pick yourself up and figure out how to clear the higher hurdle.

Building a bigger down payment in less than two years

The following is an example to how you can get back into position to buy a house in less than two years.

Assume you had your sights set on a $175,000 house. A 3.5% down payment and a 1.75% upfront mortgage premium would have meant setting aside $9,080.31. Now, a 10% down payment and a 2.25% upfront mortgage premium would raise that initial hurdle to $21,043.75. The total difference is $11,963.44. How do you close that gap?

The first thing to do is get the initial $9,080.31 into a money market account. Nationally, according to the FDIC, money market rate averages are slightly higher than savings account rates. In return for higher rates, access to funds in money market accounts may be limited, but not nearly as restricted as if you put the money into a certificate of deposit. If you shop on Money-Rates.com, you should be able to find money market accounts paying in the neighborhood of 1.5%. The idea is to make sure the savings you've accumulated so far are safely earning a good rate of interest while you are building up the rest of your down payment.

Starting from a base of $9,080.31, you would be able to build up to $21,043.75 in just under two years if you set aside $500 a month. If you could somehow increase this to $750 a month, you'd meet your goal in just 16 months. Especially in a continuing tough economy, increasing your savings rate is easier said than done--but for the vast majority of people, there's always more room to cut expenses. This Money-Rates.com article is full of ideas to help slash your budget.

Here's the best part: by making a higher down payment, you'd lower your monthly mortgage payment and your total interest expense over the life of the mortgage. On a $175,000 house with a 5.75% 30-year mortgage, moving from a 3.5% to a 10% down payment would mean that in addition to having less principal to pay back, you'd pay about $12,000 less interest over the life of the mortgage.

That's an example of what they mean by "good things come to those who wait."

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