FHA loans allow you to buy a home with as little as 3.5% down on the home and with a credit score as low as 580. Before you jump on board with the program, though, you should know the maximum amount you can borrow with this loan program.
Unlike conventional loans, there isn’t one maximum loan amount across the country. Instead, the FHA sets maximum loan amounts by county based on the average cost of housing in each area. Typically, the FHA changes the maximum loan limits on an annual basis and they often increase year over year, unless there is a major decline in home values.
The Current FHA Maximum Loan Limits
The FHA is required to set the maximum loan limits at 115% of the median home prices for the area. They do have specific floor and ceiling limits they must also use, though. In 2018, the loan ceiling, or the maximum any FHA loan can go even in high-cost counties is $679,650. The floor limit, which is always 65% of the national conforming limit is $294,515. This is the lowest any county’s maximum FHA loan limit can get. This is 65% of today’s national conforming limit of $453,100.
You can look up individual counties to learn their loan limits here.
Qualifying for an FHA Loan
It’s not enough to say that you live in a specific county, so you assume you are eligible for the maximum loan limit for the area. Instead, you have to prove that you qualify for the specific loan amount that you request.
The FHA does have flexible underwriting guidelines, making it easy to qualify, but you must meet the following:
- Minimum 580 credit score – With a 580 credit score, you can make a down payment as low as 3.5% of the purchase price of the home. The FHA does allow credit scores as low as 500, but you would need to make at least a 10% down payment. Many lenders do require higher scores than this just to protect themselves from the risk of default.
- Stable employment – The FHA prefers it if you have the same job for at least 2 years. This gives the lender a chance to predict your income and know that you can afford the loan they provide. If you have a ‘newer’ job, you may be able to qualify if the job is within the same industry or you can prove that you have training/education to succeed in the new industry.
- Maximum 31% housing ratio – Your housing ratio is the percentage of income that the new mortgage takes up. The FHA doesn’t want lenders giving out loans that take up more than 31% of a borrower’s income.
- Maximum 43% total debt ratio – Your total debt ratio is the housing payment plus any other monthly obligations compared to your gross monthly income. The FHA doesn’t want this ratio to be any higher than 43% to prevent the risk of default.
Paying Mortgage Insurance
All FHA loans, no matter the amount of the down payment, must pay mortgage insurance for the life of the loan. In fact, you’ll pay mortgage insurance twice on an FHA loan. The first is the upfront mortgage insurance. Right now, this amount is 1.75% of your loan amount. You pay it at the closing or wrap it into your loan amount if you can’t pay it upfront.
The second type of mortgage insurance is the annual mortgage insurance. You pay this insurance monthly, but it’s calculated on an annual basis. The lender calculates the premium based on your outstanding balance at renewal time. The FHA charges 0.85% of the outstanding principal balance per year. They then divide that amount into 12 equal payments and add it to your loan amount.
FHA loans are a great way to get a loan if you have less than perfect credit or a small amount of money to put down on the home. Knowing your county’s loan limits will help you determine if an FHA loan will work for the home that you want to buy.Click to See the Latest Mortgage Rates»