How Much of an FHA Loan Can I Qualify For?
Are you a would-be homebuyer with either small savings for a down payment or a lower credit score? If so, an FHA loan may be your best mortgage option. Unfortunately, FHA loans often have lower lending limits compared with other types of mortgages. This article explains how FHA loan limits and lending requirements may affect your next mortgage.
- How much can I borrow with an FHA loan?
- FHA loan requirements
- A note on FHA guaranteed reverse mortgages
- How much house can I afford?
- Comparison shopping for an FHA mortgage
- How much an FHA loan do you qualify for?
How much can I borrow with an FHA loan?
The U.S. Department of Housing and Urban Development (HUD) sets the borrowing parameters on all FHA-guaranteed mortgages. One of biggest differences between FHA loans and other mortgages are the loan limits. Loan limits are the maximum amount a person can borrow on a mortgage. In 2018, loan limits on FHA mortgages range from a floor of $294,515 to a ceiling of $679,650 in the lower 48 states. Loan limits adjust every year based on the cost of housing.
Throughout much of the country, loan limits on FHA loans are 65% of the value of conventional loan limits. This table compares FHA loan limits to conventional loan limits in HUD’s designated low-cost counties.
|FHA Loan Limits vs Conventional Loan Limits in Low Cost Areas|
|FHA loan limit||Conventional loan limit|
However, that trend doesn’t hold in every county. In more expensive counties, loan limits on FHA loans look more like the conventional mortgage limits. For example, in Wake County, N.C., you can borrow up to $318,550 for a single-family home using an FHA loan. Meanwhile, the loan limit for a conforming loan remains at $453,100.
Once you get to high-cost areas, such as Garfield County, Colo., loan limits for FHA loans and conventional mortgages are exactly the same: $679,650. Outside of the lower 48 states, loan limits on FHA and conforming loans go even higher to account for higher construction costs.
These are the loan limits for FHA and conventional loans in high cost areas and special exception areas.
|FHA Loan Limits vs Conventional Loan Limits in High Cost Areas|
|FHA loan limit (high-cost area)||Conventional loan limit (high-cost area)||FHA loan limits (Alaska, Hawaii, Guam and the Virgin Islands )||Conventional loan limits (Alaska, Hawaii, Guam and the Virgin Islands)|
To find out how much you can borrow in your county, use HUD’s FHA mortgage limits calculator.
FHA loan requirements
Of course, the loan limits only explain how much a person can borrow on their mortgage in a given county. The exact amount you can borrow will depend on a variety of factors, especially your income and your existing debt load.
In general, FHA loans allow you to take on a mortgage payment of up to 31% of your gross income if you have existing debts. Your total debt-to-income (DTI) ratio cannot exceed 43% (in most cases). DTI is the sum of all your monthly debt payments, including your mortgage payment, divided by your gross income.
Using these numbers, a couple that earns $60,000 annually will qualify for a loan payment of up to $1,550 per month. The payment includes principal and interest payments, mortgage insurance, homeowners insurance and property taxes. Assuming a 4.00% interest rate and an $8,050 down payment, that couple could buy a $230,000 home (the exact size could vary based on property tax rates and other non-insurance costs). The total loan size for this mortgage would be $226,000 including a $221,950 principal loan balance and a $3,884 upfront mortgage insurance fee. Even in a high cost of living area, the couple earning $60,000 will not qualify for a larger loan.
If you don’t have any debt, the FHA will allow you to put up to 40% of your income toward a mortgage payment. Likewise, your DTI could go as high as 50% if you have compensating factors like residual income or large cash reserves.
These are some of the most important requirements for taking out an FHA loan.
|FHA Loan Requirements|
|Down payment||3.5% or 10% for credit scores between 500-579|
|Credit score||from 500|
|Mortgage payment-to-income ratio||31% (Up to 40% with compensating factors such as no other debt, cash reserves, residual income, etc.)|
|Total debt-to-income ratio||43% (Up to 50% with compensating factors)|
|Credit requirements||Disputing negative information (such as collections items or late payments) during underwriting may negatively affect a borrower’s ability to take out a mortgage.
Any judgments must be resolved or paid off before closing.
No short sales or foreclosures in the last three years.
No bankruptcy within the last two years (generally).
A note on FHA-guaranteed reverse mortgages
The FHA also guarantees most home equity conversion mortgages (HECMs or reverse mortgages) that are issued in the United States. Reverse mortgages guaranteed by the FHA have loan limits called maximum claim amounts of $679,650, no matter where you live in the U.S.
Unlike typical FHA mortgages, reverse mortgages don’t require any payments while you (or a qualified spouse) live in your home. The mortgage is repaid upon your death or when you move out and sell the home. You’ll never owe more on the mortgage than the house is worth.
Because of the unique nature of the reverse mortgage, the FHA sets unique requirements for borrowing with an FHA loan. The three factors it considers are the value of your house, your age (or your spouse’s age if they are younger) and the interest rate on the loan. Using these three factors, reverse mortgage lenders set the “maximum claim amount” for a reverse mortgage. This is the maximum amount you can borrow with your reverse mortgage. If your house is worth more than $679,650, then your maximum claim amount is limited to $679,650 due to the FHA loan limits.
How much house can I afford?
When you start shopping for a home, you don’t only want to consider how much you qualify to borrow. You want to take a close look at how much money you’ll pay in housing costs on a month-to-month basis.
A good way to estimate your housing costs is to use this calculator, which helps estimate your personal costs based on the house prices and down payments you enter, as well as your credit score. If you don’t know your credit score, you can check it for free. You can play around with home purchase prices and down payment amounts to see what prices actually fit into your budget.
The calculator not only breaks down your monthly mortgage debt cost, it also details how much you’ll pay in mortgage insurance premiums, estimated property taxes and homeowners insurance.
When you understand how much you’ll pay month in and month out, you can make a better decision about how much you actually want to borrow (even if you could qualify for a larger mortgage based on your income or location).
Comparison shopping for an FHA mortgage
Once you know approximately how much you want to borrow, it’s time to start shopping for a mortgage. When you shop for an FHA mortgage, you can compare rates from multiple lenders to see which lender offers the lowest interest rates and fees. You can get a ballpark estimate of rates and fees by looking at current loan rates, but it pays to get personalized offers. Lenders that know you’re shopping for rates are more likely to give you the best possible deals on rates and fees.
While you compare rates and fees from lenders, you should ask them if they offer 3% down conventional loans. Borrowers with good credit scores may find that a low down payment conventional mortgage offers a better deal than an FHA loan.
How much an FHA loan do you qualify for?
Whether you’re buying a home that fits easily within the FHA lending requirements or you’re just on the edge, it’s important to understand the FHA loan before you apply for it. For some borrowers, the FHA loan is an obvious choice. Other borrowers find that the lending limits are too stringent.
Either way, once you understand how much you qualify to borrow (and how much you can really afford), knowing whether to take out an FHA loan becomes a much easier decision.
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