FHA Loan Limits Rise: Here's What You Need to Know

by Maurie Backman | Updated Nov. 29, 2021 - First published on Jan. 26, 2021

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FHA borrowers now have more options when it comes to more expensive homes.

If you're looking to buy a home but don't have a lot of money to put toward a down payment, you might consider an FHA loan. These government-backed loans allow you to put as little as 3.5% down on a home purchase, and they have lower credit score requirements, too. With a conventional mortgage, you'll generally need a score of at least 620 to get approved, whereas FHA lenders will usually accept a score of 580.

That said, there are limits on how much you can borrow with an FHA loan. But this year, those limits are rising. Here's what you need to know.

New FHA loan limits

With home values skyrocketing on a national level, you may need a higher mortgage than ever to buy. The good news is that FHA loan limits are increasing this year. In 2020, the limit for FHA loans was $331,760, but this year, that figure jumped to $356,362.

That said, in some parts of the country, where home prices are notably expensive, FHA loan limits will rise to $822,375, up from $765,600 in 2020. And in Alaska, Hawaii, Guam, and the U.S. Virgin Islands -- areas known for much higher construction costs and home prices -- this year's FHA limit will sit at $1,233,550 (up from $1,148,400 in 2020).

Should you get an FHA loan?

An FHA loan can be a good option if your credit score needs work or you haven't saved much for a down payment. But there's a drawback to getting an FHA loan, and it's having to pay mortgage insurance premiums. First, you'll pay a one-time premium of 1.75% of your home loan's value. If you're taking out a $500,000 mortgage, that's an extra $8,750 you'll need to cough up. That said, you won't necessarily have to write out a check for that initial premium at closing. Rather, you'll generally have the option to roll it into your loan and pay it off over time.

You'll then be liable for annual mortgage insurance premiums that range from 0.45% to 1.05% of your loan amount. If you make less than a 10% down payment on your home and take out an FHA loan, you'll never get to cancel those mortgage insurance premiums. This differs from private mortgage insurance on a conventional loan, which you'll have to pay if you fail to put 20% down -- it can go away once you have 20% equity in your home.

Before you decide to apply for an FHA loan, it could pay to see if you qualify for a conventional mortgage. This is especially true if your credit score is in decent shape. But if you're really limited on funds for a down payment, an FHA loan may be your best (and only) choice. And to be clear, it's not a bad choice. Just be aware of the extra costs you'll incur, and shop around with multiple FHA lenders before accepting an offer. You never know if one lender will give you a more competitive interest rate than another, so having options helps.

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