What Are FHA Loan Limits?

When someone refers to the American Dream, this often includes achieving the goal of homeownership. Purchasing a home is synonymous with moving up in social status, making a wise investment, and enjoying financial security. The desire to claim a house as their own, as a place where a family can grow and be safe, is a singular driving force for many people.

As house prices continue to rise, the divide between homeowners and homeowner hopefuls continues to widen. That’s where programs such as the Federal Housing Administration (FHA) can be a savior. It’s important to more that the FHA has serval programs for homeowners which will be discussed later in the article.

If you’re wondering if FHA could be the solution you’re looking for, this FHA guide will help you decide.

Best Mortgage Rates

What is an FHA Home Loan?

The Federal Housing Administration, or FHA, is part of the U.S. Department of Housing and Urban Development and insures home loans for borrowers with low credit scores or needing a lower down payment than conventional loans. Because the government insures these loans, they have less stringent qualifications than traditional mortgages.

FHA-insured loans are available to borrowers with credit scores as low as 500 with a minimum of a 10% down payment (depending on your lender), and borrowers may be able to qualify for a 3.5% down payment with a credit score of 580 and above (at lenders discretion).

The FHA does not directly issue the loans. There is an approved national network of FHA lenders who process the borrower’s application and complete the underwriting to determine whether or not the loan is approved?

What is the FHA?

The Federal Housing Administration (FHA) is a government agency established as a part of the Housing Act of 1934. The Federal Housing Administration (FHA) aims to promote homeownership and provide affordable housing options. The purpose of the FHA is to help people who may not otherwise qualify for a conventional mortgage obtain financing. So it is no surprise that FHA loans are a popular choice for first-time homebuyers or those whose credit scores are less than perfect.

All of this is made possible by FHA mortgage insurance which protects lenders if a property owner defaults. In this case, the FHA pays a claim to the lender for the unpaid principal balance.

In 2021, over 1.1 million borrowers took out FHA loans—that’s more than 10% of all mortgages! According to the Mortgage Bankers Association, almost 20% of first-time homebuyers also use FHA loans.

What is the difference between an FHA loan and a conventional loan?

  • FHA has lower down payment requirements from 3.5% to 10%, depending on credit scores.
  • A conventional lender will require (in most cases) a 20% down payment.
  • FHA credit score requirements starting at a minimum score of 500 allow more people to qualify. Of course, the FHA lender may or may not process a loan at such a low score.
  • Conventional lenders require a credit score minimum of 680, with 700+ being much better for securing favorable loan terms.
  • The FHA is very lenient regarding the source of the down payment and closing costs. Gifts from family or charities are allowed.
  • Convention lenders are much less receptive to monetary gifts. Generally, they will require a seasoning period (holding) of the money which could be as long as a year.

What types of FHA loans are there?

The purpose of the FHA is to provide different loan options to assist first-time homebuyers and existing homeowners.

There are five loan programs available:

Basic Home Mortgage Loan 203(B)

  • The borrower must meet standard FHA credit qualifications.
  • The borrower is eligible for approximately 96.5% financing.
  • The borrower is able to finance the upfront mortgage insurance premium into the mortgage.
  •  The borrower will also be responsible for paying an annual premium.
  •  Eligible properties are one-to-four unit structures.

Rehab Mortgage Loan 203(k)

  • The cost of the rehabilitation must be at least $5,000
  • The total value of the property must still fall within the FHA mortgage limit for the area.
  • The value of the property is determined by either (1) the value of the property before rehabilitation plus the cost of rehabilitation, or (2) 110 percent of the appraised value of the property after rehabilitation, whichever is less.

Construction to Permanent (CP) Loan

Refers to the construction of a dwelling on land owned or being purchased by the Borrower. The CP program combines the features of a construction loan with that of a traditional long-term permanent residential Mortgage using a single mortgage closing prior to the start of construction.

Energy-Efficient Mortgage (EEM) Loan

  • The FHA Energy Efficient Mortgage covers upgrades for new