If you’ve done a bit of research on low down payment mortgage options, chances are you’ve come across Federal Housing Administration loans. These loans are a popular option for borrowers who have limited savings because you might be able to qualify with a down payment of as little as 3.5% and great credit isn’t required.
Although the eligibility criteria for an FHA loan are flexible, there are certain requirements to get a loan. There are also limits to how much you can borrow.
In this article, we’ll discuss how FHA loan limits are set, what they are, and other important numbers you need to know.
What is an FHA loan?
An FHA loan is a home loan insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD). The main difference between FHA vs. conventional loans is that the government backing on FHA loans makes it possible for lenders to offer them with less stringent qualifying criteria.
Just as certain types of conventional loans have limits, there are also limits on how much you can borrow with an FHA loan. The FHA sets loan limits each year, and they’re based on a few different factors.
How are FHA loan limits determined?
After the 2008 housing crisis, Congress enacted the National Housing Act and Housing and Economic Recovery Act to better regulate lending practices. As part of these new regulations, the FHA became required to set loan limits each year.
In part, the FHA determines its lending limits by taking into account both geographic area and type of home. Areas that are lower-cost are subject to lower loan limits, which the FHA calls a “floor” limit. Higher-cost areas are subject to higher loan limits, or a “ceiling” limit. This means that homebuyers in different counties might be eligible for a smaller or larger loan amount, depending on where they’re located and the type of home they’re purchasing.
The FHA also considers conventional conforming loan limits when determining their annual limits. Conforming loans are loans that meet certain criteria and can be guaranteed by Fannie Mae and Freddie Mac. Limits for these loans are determined by the Federal Housing Finance Agency (FHFA), and they’re based on the median home prices in a given area.
For 2021, the floor limit for FHA loans is 65% of the national conforming loan limit, while the ceiling limit is similar for both FHA and conforming loans.
What are the FHA loan limits for 2021?
Typically, the FHA sets its annual loan limits for the coming year in December, and the limits are subject to change for the following year based on the criteria outlined above. Here are the FHA mortgage limits for 2021:
There’s one notable exception to these limits. Properties in Hawaii, Alaska, the U.S. Virgin Islands, and Guam are subject to higher limits. For instance, qualifying borrowers in those areas could take out a single-family FHA loan up to $1,233,550.
FHA vs. conventional loan limits
As you’re shopping around for home loans, it’s a good idea to understand the differences between FHA vs. conventional conforming loan limits. Of course, there are also other important criteria to consider as you’re comparing the two options — more on that in a minute.
|FHA loan limits||Conforming loan limits|
|Single-family property||$356,362 (low-cost areas)||$548,250 (low-cost areas)|
|$822,375 (high-cost areas)||$822,375 (high-cost areas)|
|Two-unit property||$456,275 (low-cost areas)||$702,000 (low-cost areas)|
|$1,053,000 (high-cost areas)||$1,053,000 (high-cost areas)|
|Three-unit property||$551,500 (low-cost areas)||$848,500 (low-cost areas)|
|$1,272,750 (high-cost areas)||$1,272,750 (high-cost areas)|
|Four-unit property||$685,400 (low-cost areas)||$1,054,500 (low-cost areas)|
|$1,581,750 (high-cost areas)||$1,581,750 (high-cost areas)|
If you need to borrow more than these limits for a house, this could be done with a conventional non-conforming loan. For instance, jumbo loans are a type of non-conforming loan that exceeds conforming loan limits. However, they tend to have stricter eligibility requirements than other loans because you’re borrowing such a large amount.
FHA loan eligibility criteria
A big draw of FHA mortgages is that down payment and credit score requirements typically aren't as strict as those of conventional mortgages. Conventional loans might require a 20% down payment and a credit score of 620 or above, which can make homeownership too expensive or difficult for many.
With FHA loans, borrowers with a credit score of 580 or above might qualify for a mortgage loan with as little as 3.5% down. This could make saving for a down payment much easier. With a lower credit score in the 500 to 579 range, you might still qualify but you’ll need to put 10% down.
Your debt-to-income (DTI) ratio is another factor that lenders will review to determine whether you qualify for this type of loan. There are two DTI ratios — front-end DTI and back-end DTI.
Here's how both types of DTI work:
- Front-end DTI: This percentage shows how much of your monthly income goes to your housing payment. It’s calculated by dividing your projected housing payment by your monthly gross income and then multiplying by 100. So if your housing payment would be $1,500 a month and your monthly gross income is $5,000, your front-end DTI would be 30%.
- Back-end DTI: This percentage expresses how much of your income goes toward all of your monthly debt payments. You calculate your back-end DTI by adding up all your monthly debt payments (including the mortgage payment), dividing that sum by your gross income, and then multiplying by 100. So if your total debt payments are equal to $2,150 a month and your monthly gross income is $5,000, your back-end DTI would be 43%.
Generally, if you want to qualify for an FHA loan, the maximum front-end DTI you can have is 31%, and the limit is 43% for the back-end DTI. However, other factors, such as having a lot of cash in reserves or a high income could help you qualify with a DTI of up to 50%.
Other things to be aware of include closing costs, mortgage insurance, and borrowing limits. Closing costs on an FHA loan typically range from 2% to 6% of the loan amount, but you could get help paying these costs with loans, grants, or employer assistance.
You’ll also have to pay upfront and monthly mortgage insurance premiums (MIPs) with all FHA purchase and refinancing loans. The upfront premium is 1.75% of the total loan amount, and the sum of the monthly premium can range from 0.45% to 1.05% of the loan balance per year.
|Minimum credit score||500|
|Down payment required||3.5% for FICO scores over 580
10% for FICO scores from 500-579
|Maximum debt-to-income ratio||50%|
|Closing costs||2% to 6%|
|Mortgage insurance required||Yes|
How to find FHA loan limits for your area
The FHA considers most areas of the country as low-cost areas, which means they’re subject to the floor limits for single-family or owner-occupied one-unit to four-unit investment properties. However, depending on where you live, the limits might be higher.
Wondering what the maximum loan limit for FHA mortgages is in your neighborhood? You can look it up on the U.S. Department of Housing and Urban Development website.
How to get an FHA loan
How to get a loan through an FHA program is similar to getting any other home loan, except you have to apply with an FHA-approved lender.
If you are considering an FHA home loan to purchase a single-family home or an owner-occupied two- to four-unit investment property, a good first step is getting pre-approved for a conditional loan offer. The pre-approval process generally involves a credit check that affects your credit score.
After you find a house, your loan application goes through underwriting, which is when the lender does a more thorough review of your application. During this process, the lender may ask for tax documents, pay stubs, financial statements, and other information to verify your income, assets, and employment. You’ll also receive loan disclosures that outline the terms and costs of the loan.
If you pass underwriting, the final step is closing, where you sign the paperwork, exchange funds, and take ownership of the home.
Applying for an FHA refinance could work a bit differently than a typical refinance, in some cases. For example, the FHA streamline refinance offers an abbreviated process for homeowners. You don’t have to do a home appraisal, a credit check might not be necessary, and your income might not need to be verified. This means you may refinance faster and with less paperwork than a traditional refinance.
What’s the maximum amount you can borrow with an FHA loan?
The maximum amount you can borrow for a single-family FHA loan is $822,375 in high-cost counties and $356,362 for low-cost counties. The one exception is if you’re participating in the energy-efficient mortgage (EEM) program. In this program, you may be able to exceed loan limits when financing a home and qualifying energy-efficient home upgrades with one FHA loan.
What qualifications are needed for an FHA loan?
The minimum credit score you need for an FHA loan is 500. Having a credit score of 580 or above could qualify you for 3.5% down. With a score below 580, you might still be able to qualify but with 10% down.
Generally, the maximum DTI you can have is 43%, but there may be some flexibility there. If you have a high income or a lot of money stashed in savings, you may be able to qualify with a higher DTI.
Do FHA loans require mortgage insurance?
Yes, FHA loans require mortgage insurance premiums upfront and monthly. The upfront payment is 1.75% of your home loan, and the total monthly premiums can range from 0.45% to 1.05% per year, depending on how much money you put down.
How are conventional loan limits different from FHA loan limits?
For 2021, the conventional conforming loan limit for single-family homes is $548,250 in low-cost areas and $822,375 in high-cost areas. With FHA loans, the limit for single-family loans in low-cost areas is $356,362, and it’s $822,374 in high-cost areas.
FHA home loans are government-backed loans with lenient eligibility criteria that you could consider for your first loan (or next loan) if you have a small sum saved for a down payment. Excellent credit isn’t necessary to get approved, but there are loan limits, credit minimums, and DTI requirements to keep in mind before borrowing.
Whether you’re trying to buy a home or refinance a mortgage, there are FHA loan programs you could consider. An FHA-approved lender could help you determine which programs will be the most beneficial based on your home-buying goals. Our list of best mortgage lenders includes lenders that offer FHA loans, and you can use it to compare options.
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