FHA Loans Limit in 2020

Federal Housing Administration loan limit is the maximum amount of money that would be insured to the various categories of mortgage house loans the FHA operates in. These different categories of mortgage include single-family homes, duplexes, and large homes available in the various counties of each state. The loan limits on each of these houses are often calculated and updated every year by Fannie Mae and Freddie Mac.

What Is An FHA Loan?

An FHA loan is a mortgage loan issued by the FHA accredited lender and insured by the FHA. To start with, the Federal Housing Administration FHA for short has been part of the United States Housing and Urban Development since 1965. However, the FHA has been in business 30 years before this time. The events that led to the existence of the FHA include the stock market crash and the Dust Bowl Draught. Owing to the economic crash that comes with these two events, by early 1933, virtually half of the American popular defaulted on their mortgage. 

The FHA came into existence in 1934 as part of the National Housing Act that can place the same year. The aim of the administration is to make homeownership more affordable. The FHA begins its operation by offering a 20% down payment and insuring mortgage of 80% to homeowners as against the 50% that was in place this period.  Today, the FHA loan offers a 96.5% mortgage to homeowners. This means that homeowners only pay a 3.5% down payment. Hence, the type of mortgage loans offered by the FHA loans is designed to assist low to moderate income earners and offers a minimum down payment more than many of the conventional loans. However, before anyone can qualify for the FHA loan, you would need a credit card from 500 and above. If you have a credit card of 500 to 579, your down payment would be 10% of the base loan. But if your credit card is from 580 above, your down payment would be 3.5%. 

Because of the minimum down payment offered by FHA, it is one of the most widely sort after loans, especially among first time home buyers.

Important Information About FHA Loans

• FHA loan is backed up by the United State Government. It is aimed to assist low-to-moderate income earners who are interested in becoming house owners. With FHA Low-income, low-income earners can still benefit from the huge advantage of FHA loans. 
• FHA loans operate a very low income down payment and low credit score when compared with other conventional loans
• Banks and financial institutions that operate FHA loans are approved and accredited.
• Before any FHA loan would be issued, the necessary qualifications of the borrower would be reviewed.
• FHA loans come with stringent requirements, specific guidelines, and restrictions.

Note: Obtaining an FHA loan is different from borrowing money to purchase a house. The FHA loan is from an approved financial institution. The approved institutions are the lenders. The FHA lenders can be any bank, credit union, or other financial institutions. When the loan is issued, the FHA guarantees or approves it. This is why many people refer to the FHA loan as an insured loan. 

Also, when you want to pay the loan, you would be required to pay through a mortgage insurance premium to the FHA. If you default the loan, the FHA pays a claim to the lender. Hence, an FHA lender bears less risk. This is also one of the major reasons FHA lenders are willing to offer loans to borrowers who might not be qualified for loans in other conventional bodies. 

FHA loans are not used to buy a home alone. The loans can be used to renovate an existing house or to start new construction. 

How The FHA Loan Operates

There are two types of mortgage insurance premium you would be required to pay when you obtain the FHA loan. These loans include the Annual MIP - usually charged monthly - and the Upfront Mortgage Insurance Premium (UFMIP). As of 2020, the Upfront MIP is calculated as 1.75% of the base loan. It means that, if, for instance, you are issued a home loan of $400,000. It means that your Upfront MIP 1.75%×$400,000 = $7,000. To make the payment, an escrow account would be set by the U.S treasury where you will deposit into. This payment is later used as your mortgage payment in case you default on the loan. 

Contrary to the name Annual MIP, this payment is calculated and paid every month. Annual MIP is often calculated as 0.45 to 1.05% of the base loan. The calculation is determined by these three conditions: the amount of the loan, the length of the loan, and the original loan-to-value ratio (LTV). The commonest calculation for Annual MIP is 0.85% of the total loan. Using our previous example, a loan of $400,000 would have an Annual MIP of 0.85% × $400,000 = $3,400 monthly. This would be added to the Upfront MIP and paid as at when due. 

The length of payment for the Annual MIP varies from borrower to borrower. If your down payment is calculated with 10%, you would be required to pay the Annual MIP for 11 years. However, if your down payment is calculated with 3.5%, you would pay the Annual MIP for the length of the loan. 

Types of FHA Loans

Aside from the traditional mortgage offered by the FHA loan program, they offer additional types of programs such as: 

• Home Equity Conversion Mortgage (HECM)

This is a mortgage program that aims to help adult homeowners convert their home equity into cash, while still retaining the title to their homes. The program is usually offered to people aged 62 and above. The owner or participant in this program determines how he or she wants to withdraw the money either as a line of credit or a fixed monthly amount. Also, the participant can choose to operate in both methods. 

• FHA 203(k) improvement loan

This type of loan allows the participant to get their loans for the purpose of acquiring a home or for improving an existing home. With this loan, a participant who does not have much money after their down payment can still furnish their home and make it look good. 

• FHA’s Energy Efficient Mortgage program

This program is similar to the FHA 203(k) improvement loan but aims to provide loans that can help to lower utility bills such as the new installation of wind energy systems or solar. The rationale behind this program is that energy-efficient homes have lower operating costs which inadvertently lower bills and make more income available for the payment of mortgage loans. 

• Section 245(a) loan

This is a type of loan aimed at increasing borrowers' income. In Section 245(a) loan, the Graduated Payment mortgage begins with lower initial monthly payments that gradually increase over time, and the Growing-Equity Mortgage has scheduled increases in monthly principal payments that result in shorter loan terms.

A Comparison Between FHA Loan And Conventional Loans

To be qualified for FHA loans, you must have a credit score of not lower than 500. On the one hand, if your credit score is between 500 and 579, you would be qualified for the FHA loan but your down payment would be 10%. On the other, if your credit score is from 580 and above, you would be qualified for an FHA loan down payment of as little as 3.5% of the base loan. 

While the FHA program offers loans to people with a credit score of 500 and above, the conventional loan program only offers loans to people with a credit score of 620 and above. The down payment for the conventional loan is from 3% to 20%.

Also to be qualified for an FHA loan, you need to be at least two years out of bankruptcy unless the situation surrounding the bankruptcy is an uncontrollable one. You must also be at least three years removed from any foreclosures and demonstrate you are working towards re-establishing good credit.  If you are defaulting on your income taxes or federal income loan, you won't be qualified for the FHA loan.

FHA loan limits

All loans have their limit and the FHA loan program is not different. The limit on FHA loans varies from county to county. In 2020, the minimum loan that can be gotten from an FHA loan fall between $331,760 to $765,600. In the low counties like Lucas County, Ohio, where Toledo is located, the upper limit is $331.760. For higher counties like San Francisco County, California, the upper limit is $765,600.

Aside from the high and low counties, there are some counties that fall in between. The FHA loan limits for these counties are also in between. A good example of such counties includes Colorado, Denver. The FHA loan limit for these counties in $575,000. 

FHA Loan Requirement

Aside from some of the requirements explained while looking at the comparison between a conventional loan and FHA loan, there are also some other requirements for FHA loan to consider. It is also important to note that FHA loan lenders may have an additional stipulation for borrowers. Therefore, before settling for an FHA approved lender, seek others, and compare. 

Down payment

One important thing to note about down payment is that it does not have to be your saving alone. Down payment can be paid with gift money so long as the donor provides detailed information about the payment. 

Debt-to-income ratio (DTI)

The minimum DTI for FHA is 50. This implies that your total monthly debt payment must not be more than 50% of your pretax income including the debt you are not actively paying. To calculate your DTI, FHA loan underwriter will include 1% of the total loan as your monthly payment for students loan in deferment. If you have other loans that you are not currently repaying, your DTI would be calculated by underwriters with 5% of the loan. 

Property Approval

The type of property you want to use the FHA loan to get must meet the approval of the FHA loan minimum property requirements. The FHA requires an appraisal that is different from a home inspection. The aim is to be sure that the home you are collecting the loan for is worth the money. Also, they would inspect to ensure that the house is well secured and of livable standards.

If the loan is an FHA 203(k) loan, the property might undergo two different forms of inspection: the "as is" and the "after improved." The "as is" appraisal looks at the current state of the property and the "after improved" assess the value of the property once it is completed.

Mortgage insurance

In every FHA loan, there is mortgage insurance. Once you obtain the FHA mortgage, you would be required to make an upfront mortgage insurance payment, thereafter you make a monthly payment. For instance, if your down payment is less than 10%, you would be required to continue to pay mortgage insurance for the rest of the life of the loan. However, if the down payment is 10%, you would only be required to pay mortgage insurance for 11 years. 

How To Apply For FHA Loan

Some of the personal document that would be required to apply for the FHA loan include:

• Valid security social number
• Bank statement containing the detail of your transactions in the last 30 days 
• Proof of your USA citizenship, legal permanent address or proof of your eligibility to work in the US

Other information like your credit score, employment record, and tax returns can be automatically accessed by the FHA lenders.

Pros and Cons of FHA loan

Although the conditions attached to obtaining an FHA loan might seem too cumbersome, the loan has some great advantages. Some of the advantages include:

• Low credit score minimum when compared to other conventional loans
• A high debt-to-income ratio of up to 50%
• Down payment as low as 3.5%

Cons

• The mortgage insurance of the loan can last up to the length of life of the loan
• Strict conditions for properties to meet
• The approved loan often tally with the worth of the property. Hence, no jumbo loans

Summary

Before going for an FHA loan, ensure it is the best thing for you. For those with bad credit or a credit score below $500, FHA is not the best for you. In fact, the federal housing themselves put it that an FHA loan "won't accommodate those who are shopping on the higher end of the price spectrum—nor is it intended to. The FHA loan program was created to support 'low- and moderate-income home buyers,' particularly those with limited cash saved for a down payment."