Calculated and Updated Annually
The FHA sets annual lending limits for home loan amounts that it will insure. These limits are determined based on the county in which you live and the type of property you're purchasing. Low-cost areas of the country have a lower limit, known as the "floor," and high-cost areas have a higher figure, called the "ceiling". It's not uncommon for the ceiling loan limit to be more than double the floor for single-family properties.
The limits also vary based on the type of property. For instance, Houston, TX (Harris County) loan limits for duplexes can be almost 30% higher than for a single-family home. That number increases to more than 50% for a triplex.
How Are FHA Loan Limits Determined?
The FHA Loan Limits, which are updated annually, are determined based on two factors. The first is geography. Loan limits vary based on the county where the property is located, except for those that are in metropolitan areas where the limits are set using "the county with the highest median home price within the metropolitan statistical area," according to HUD.
Limits are also set based on a percentage of conforming loan limits set by the Federal Housing Finance Agency (FHFA). A "conforming loan" is one that falls under these limits and is eligible to be purchased by Fannie Mae or Freddie Mac, but isn't explicitly guaranteed by anyone. The FHA uses the national conforming loan limits to set its own limits for the loan amount it will insure. For example, the FHA's minimum national loan limit "floor" for low-cost areas is typically set at 65% of the national conforming amount for the U.S.
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Loan Limits by State and County
The FHA determines high-cost areas of the country based on income levels, cost of construction, and demand for housing. Heavily populated metropolitan areas such as Los Angeles county have higher median home prices which results in high limits for all home types. These are at the high end of the FHA loan limits, also known as the ceiling. That ceiling is set at 150% of the national conforming loan limit.
On the low-end, the FHA's floor is set at 65% of the conforming loan limit. With the low cost of construction and income levels when compared to large metropolitan cities, cities like Montgomery, Alabama have lower limits. However, home prices are generally lower in these areas.
There are counties that fall between the floor and ceiling. If the home value falls between the lower and upper FHA loan limits, the one-unit limit is equal to 115% of the median sale price of a home in the area. For example, if the median sale price in a particular market is $500,000, the loan limit would be (115% of $500,000) $575,000.
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FHA Limits for High Cost Homes
There is a chance that you'll fall in love with a home that costs more than what the FHA will insure. However, if it turns out that you are able to afford a larger down payment, you can stick with an FHA loan. By putting up more than the minimum 3.5% on the house, borrowers are able to buy a pricier home with the same FHA loan limit.
Another option is to apply for a conforming mortgage. This may work out better since the conforming loan limit is typically higher than the FHA limits in nearly 80% of the counties in the U.S. Buyers with good credit and sufficient income who can afford a larger down payment can benefit from this type of mortgage and may find it less expensive in the long run.
However, some houses may exceed both conforming and FHA loan limits. In such cases, borrowers might want to consider a jumbo loan.
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Do I Need a Jumbo Loan?
There are always cases where potential homebuyers want to a purchase a house that exceeds the FHA's loan limit for that county. In this case, FHA Jumbo Loans come into play.
Jumbo loans are mortgages which exceed the FHA's county limit for home loans in a given zip code. When a lender approves a jumbo loan, they are essentially taking on an even greater risk. That's why the FHA has a more stringent set of requirements for borrowers looking to apply for such a large loan.
Instead of the FHA's established minimum credit score of 580, the minimum for a jumbo loan is 600, and 640 for refinances. Additionally, jumbo loan borrowers cannot receive down payment assistance; the FHA mandates that the minimum 3.5% down payment is paid with the homebuyer's own funds to ensure there are sufficient financial resources to cover closing costs.
An FHA Jumbo Loan might require two separate appraisals if the market is declining or the borrower is making a down payment of 5% or less. It is also important to note that FHA jumbo loans typically have higher interest rates than conventional jumbo loans. Keep in mind that FHA lending limits vary by area, which means what constitutes a Jumbo Loan in one county isn't the same as another.
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Loan Limits Based on Home Type
Since FHA loans are exclusively for owner-occupants, many people don't realize that they are able to buy more than a single-family house. The FHA insures loans to purchase a duplex, triplex, or four-unit property as long as the borrower continues to live in one of the units. Taking this into account, the FHA determines its lending limits based on the property type as well.
Not all government agencies make this distinction. The U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA) guarantee home loans as well, but their limits work differently than the FHA. The VA has no limits on the purchase price for a home, but eligible borrowers receive a home loan "entitlement." This is the maximum amount that the VA will guarantee the lender in the case of the buyer defaulting. The only "limit" is what the lender agrees to loan to a borrower based on their own requirements.
The USDA also guarantees a portion of home loans meant for homebuyers in rural areas. Instead of lending limits based on property type, the USDA sets a maximum limit on household income to ensure that the people taking advantage of the affordable financing options are low and moderate-income families for whom it's meant.
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