On January 1, mortgage borrowers in 118 counties across the United States enjoyed an increase of limits on Federal Housing Administration (FHA) loans. New FHA rates call for loan limits in all other counties to remain at 2015 levels and no reductions in the cap will occur in any location of the country.
FHA Loan Limits
The 2016 FHA loan limits apply to all cases of single-family homes assigned on/after January 1, 2016. According to the FHA, it establishes annual loan limits based on 115 percent of the county's median house price. The "floor," or minimum amount, drops whenever the median housing price is at or below 65 percent of the national conforming loan limit.
For this year, the FHA will not change the ceiling on 2015's national loan limits, $625,500, nor will it adjust yeast year's national floor of $271,050. Limits on FHA-insured reverse mortgages will remain at 2015 levels as well. The $625,500 maximum claim limit for a Home Equity Conversion Mortgage (HECM) will also see no change for 2016.
How to Secure an FHA Loan for 2016
FHA loans are granted to qualified borrowers and are backed by the federal government, which currently pays the insurance on some 4.8 million single-family mortgages. With FHA backing, the risk to the approved participating lender is substantially lowered, allowing Americans to get moderately priced homes on loans with down payments as low as 3.5 percent. At LendingTree, consumers can compare live rates on loans to find requirements for their community. And the LendingTree Loan Calculator estimates monthly FHA loan installments based on down payment, credit score, home price and zip code.
FHA home loan underwriters follow federal guidelines for assessing down payments (3.5 to 10 percent) and FHA requirements for the borrower's debt-to-income ratio (capped at 43 percent). This includes the applicant's outstanding debt plus the estimated principal, interest, taxes and insurance on the new home – all balanced against the consumer's monthly income.
Credit scores and credit history also help the underwriter determine risk. Typically, a minimum credit score of 580 is required to obtain FHA backing. However, there are "compensating factors" that give lenders some wiggle room, such as cash reserves to cover the down payment, closing costs, and at least one month of mortgage payments.
Not hitting all the marks on credit scores is not necessarily a show stopper, but having a bad credit history may be. The FHA assumes that many of its applicants are first-home buyers, many of whom have accrued scant credit histories. One of the better ways to negotiate is to demonstrate you have paid all bills on time over the last year and don't carry excessive debt. Minimum requirements can also be flexible based on the lender, which is why it's important to shop around.