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FHA home mortgage loans, which are guaranteed by the Federal Housing Administration (FHA) and made by an FHA-approved lender, can be excellent options for homebuyers without large down payments or who have suboptimal credit histories.
As of 2020, borrowers with a FICO credit score as low as 580 can get a mortgage with a down payment as low as 3.5%, and with a competitive interest rate. Plus, closing costs can be rolled into the loan, further minimizing the buyer's out-of-pocket expenses. It's no wonder that FHA home loans are favorites among first-time homebuyers.
Having said that, it's important to realize that FHA loans are intended to help everyday Americans pursue their dream of homeownership -- not to help people buy luxurious homes. So, the FHA limits the amount of money it is willing to lend to any particular borrower. In some areas, the FHA loan limit is set as a base level, but in higher-cost markets, it's based on the median home sale price in the area.
With that in mind, here's a quick guide to the 2020 FHA home loan limits and what they mean to you as a borrower.
What are the 2020 FHA loan limits?
I won't keep you in suspense. There is one set of limits that applies to one-unit properties (such as single-family homes, condominiums, and townhomes) and another set of FHA mortgage limits that applies to properties with multiple units, such as duplexes.
FHA mortgage loan limits for a one-unit property
The FHA loan limit for low-cost areas is $331,760 in 2020. This is set at 65% of the national limit for conforming loans, which is $510,400 for a one-unit property.
However, while this is the limit in most of the United States for FHA mortgage loans, there are some high-cost real estate markets that get higher lending limits. High-cost areas within the continental United States have a one-unit loan limit as high as $765,600, which is 150% of the aforementioned conforming loan limit.
Many markets have limits between the two extremes. The one-unit limit for areas is equal to 115% of the median sale price of a home in the area, if that calculated value falls between the lower and upper FHA loan limits. For example, if the median sale price in a particular market is $480,000, the FHA loan limit for a one-unit property would be $552,000 (115% of $480,000).
In addition, there are some areas -- specifically Alaska, Hawaii, Guam, and the U.S. Virgin Islands -- that have even higher FHA loan limits. For one-unit properties, the 2020 limit in these areas is $1,148,400 for an FHA loan.
Also, bear in mind that these are the amounts that the FHA is willing to lend you, not how much you can spend on a home. They don't include your down payment. The maximum loan-to-value ratio (LTV) of an FHA loan is 96.5% (a 3.5% down payment), but if you can afford a higher down payment, your buying power will be significantly higher than these limits.
FHA mortgage loan limits for multi-unit properties
Since FHA loans are exclusively available to owner-occupants, many people don't think of FHA loans for more than one housing unit. However, FHA loans can be used to acquire a duplex, triplex, or four-unit property, as long as the buyer plans to live in one of the units. The rest can be rented out to help offset the costs of owning the home -- a strategy known as house hacking, which is quite popular among first-time real estate investors.
Chart of 2020 FHA mortgage loan limits
With that in mind, properties with more than one housing unit get higher FHA loan limits. Here's a quick reference guide to the various FHA lending limits based on the geographic location of the property and the number of housing units.
|Number of Housing Units||Base FHA Loan Limit||High-Cost FHA Loan Limit||Alaska, Hawaii, Guam, and U.S. Virgin Islands FHA Loan Limit|
If you're curious about the FHA loan limits in a specific area, the U.S. Department of Housing and Urban Development (HUD) has an easy-to-use search tool on its website.
How much can you borrow with an FHA loan?
The FHA loan limits are just one part of the equation. In other words, just because the FHA is willing to guarantee a $331,760 home loan in your area doesn't necessarily mean that you can qualify to borrow that much.
Lenders consider a few different factors, but the primary mechanism by which your maximum loan amount is determined is by evaluating your debt-to-income ratio, or DTI. This is your monthly debt obligations divided by your pretax monthly income, expressed as a percentage. For example, if your monthly payment obligations are $2,000 per month and you earn $5,000, your DTI is 40%.
There are two types of DTI ratio. The front-end DTI is the percentage of your income that will go toward your mortgage payment. The back-end DTI is the percentage of your income that will go toward all of your monthly obligations, including your mortgage payment.
While many lenders have front-end DTI maximums for FHA loans, the back-end DTI ratio is the more important of the two when it comes to loan approval, so expect a lender to look at your other debt payment obligations closely.
The standard FHA back-end DTI maximum is 43%, but it can be as high as 57% in some cases, such as borrowers with a credit score that's significantly higher than the minimum requirement.
So, the maximum you can borrow will be limited by the following factors:
- Your income.
- The interest rate on your FHA loan.
- Your expected property taxes, insurance, and homeowners association (HOA) fees on your new home.
- Your lender's maximum DTI ratio (which may be lower than the maximum allowed by the FHA).
- The FHA loan limit in your area.
In short, your ability to borrow will be limited by the FHA loan limit or your lender's maximum affordability calculation, whichever is lower.
FHA vs. conforming loan limits
A conforming loan is a mortgage that is eligible to be purchased by Fannie Mae or Freddie Mac but isn't explicitly guaranteed by anyone. This is the type of mortgage that the majority of Americans obtain when buying homes, so let's take a look at how the loan limits compare.
As mentioned, the standard FHA loan limit is specifically set as a percentage of the conforming loan limit. For 2020, the conforming loan limit in most of the U.S. is $510,400 for a single-unit property. However, in high-cost markets, the maximum one-unit conforming loan limit is $765,600 -- the same as with FHA loans.
|Number of Housing Units||2020 Base Conforming Loan Limit||2020 Conforming Loan Maximum in High-Cost Areas|
To be clear, a conforming loan will require a FICO score of at least 620, and you'll need significantly better than that if you want a low interest rate. There are low-down payment options with conventional loans, but as a general rule, the qualifications are significantly stricter than with FHA loans.
Even so, if you have the credit score to justify it, it's at least worth applying for a conventional loan or two as part of your shopping process, especially if you could potentially buy a home that exceeds the FHA loan limits, as the maximums are significantly higher in many areas.
What the FHA loan limits mean for you as a borrower
As a borrower, you need to take the FHA loan limits into account when setting your budget. Obviously, if the types of homes in your market that are within your budget and meet your needs are well under the limit, the 2020 FHA loan limits shouldn't be much of a concern to you. On the other hand, if you have an income that justifies a relatively large mortgage amount, the FHA loan limits can be a major factor in your home search.
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