FHA loans are no longer a “first-time homebuyer” loan; anyone can benefit from this easy to qualify for program. Because the FHA MIP rates have recently declined, more people are turning to this great program. Before you apply for an FHA loan, you should know the FHA loan limits to know if you would qualify for your area. The FHA has loan limits in place because it is a loan for “middle of the road” type consumers – those with average income and average credit. Ultimately, the lender has the final say in whether or not you qualify for a loan of this type, but the FHA does have their hand in the approval process. The FHA does not fund the loans – that is the lender’s job. What this government entity does do is guarantees the loans for the lender. This is done with the help of the MIP charged on your loan. These mortgage insurance premiums get placed in a reserve account, which only gets used if a consumer defaults on their loan and the bank must take control of the house again.
Something that sets these loans apart from any others is that the loan limits vary by county. Every area has its own maximum in conjunction with your individual qualifying factors. FHA loans are typically easier to qualify for, but every lender is different. What one lender might accept, another would not, so even with this loan type, it pays to shop around.
Determining the FHA Loan Limit
The FHA loan limits are generally broken down by county, but in some cases, different cities within a county might have different maximums. The FHA determines the loan limit based on the average home price in the area. This average price gets compared to the conforming limit for the nation. This amount is currently $417,000. If the average home price in your area is much higher or lower than this amount, then the FHA loan limits for your area will differ than the national conforming limit. The FHA’s lowest limit right now is $271,050 and the highest loan limit is $625,000. The limits are calculated based on homes that are less than 65 percent of the national conforming amount and those that are 150 percent more than the national conforming amount.
In 2016, 188 counties throughout the United States have higher FHA loan limits than previous years. This is based on the higher home prices these areas had last year, resulting in the increased loan amount. A few of the counties affected include San Diego, with a new limit of $580,750 up from $562,350; Mecklenburg County in North Carolina, with a new limit of $280,600 up from $271,050; and Suffolk County Massachusetts, with a new limit of $523,250 up from $517,500.
Your Qualifying Factors
The maximum FHA loan amounts allowed for your area do not mean that you automatically qualify for that amount, though. You must qualify for the loan based on your credit score/history, income, debt ratio, and loan-to-value ratio. The loan limits simply portray the maximum loan amount you would be allowed to get should you qualify for that amount. In general, your credit score needs to be above 580; your debt ratio needs to be lower than 43 percent on the back-end; and your employment needs to be steady. In addition, you can only borrow 96.5 percent of the value of the home you wish to purchase because the FHA requires at least a 3.5 percent down payment on the home. In addition, every lender has their own overlays they require on FHA loans. Some lenders are stricter than others, making it a little more difficult to obtain an FHA loan.
A Close Look at your Credit
Lenders look closely at your credit score and history in order to approve you for an FHA loan. Generally, the FHA allows a minimum score of 580 if you only put down 3.5 percent on the loan, but they do go as low as a score of 500 with a minimum down payment of 500. Keep in mind, however, that most lenders do not use these minimums; they require higher credit scores because low scores typically means financial irresponsibility. If you have a low credit score, it helps to have compensating factors in place to make up for that score. These could be things like a low debt ratio, a large amount of reserves, or steady employment. In addition, if your low credit score can be attributed to a one-time occurrence, such as a job loss or illness, you might be able to get around the lower credit score and still get an FHA loan.
Your Income and Debt Ratio
Your income and your debt ratio go hand-in-hand. The more stable your income, the more likely a lender is to approve you for an FHA loan. They typically want at least a 2-year history at the same job in order to qualify you for a loan. In addition, your income needs to be steady, such as is the case for a salary. If you have variable income from commission, bonuses, seasonal employment, or you are self-employed, you will have to prove your income with tax returns from the last 2 years. The income you reported on your taxes is averaged in order to come up with your qualifying income. If you use a lot of write-offs, keep in mind that they come right off of the top of your qualifying income, making your debt ratio higher.
Along with the area of the home you wish to purchase/refinance and your individual qualifying factors is the type of property you wish to mortgage. You can typically use an FHA loan on any property type including:
- Single family
- 2, 3, and 4-unit properties
Keep in mind, however, that the loan limits for each home type differ for each county. For example, if the maximum in your county is $417,000 that typically refers to a single family home which includes a townhome, condo, or PUD. A multiple unit property will have higher limits because it has more units in it and is more expensive. If you wish to purchase a multi-unit property with FHA financing, you must live in one of the units as your primary residence in order to qualify.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.