The Facts About FHA Home Loan Limits
Written by: Martina Hargrove
FHA loan limits, meaning the maximum amount a person is able to borrow, will depend on the borrower's geographic location, among other financial criteria. For cities that are deemed "high cost," including areas such as Los Angeles, New York or Chicago, loan limits will be higher than in those cities that are considered to be "standard areas."
Low Down Payments
According to the FHA, a borrower is allowed to buy their home using as little as three percent down on the cost of the property, as opposed to much higher percentage rates that are associated with securing conventional loans. The Federal Housing Administration does not actually issue loans, but rather insures them. This way, if a borrower defaults on their loan, the money to cover the cost is paid to the lender from the allocated insurance fund set aside specifically for this purpose.
How Much of a Loan Can You Really Afford?
Before worrying about the FHA loan limits, it's imperative to calculate how much of a loan you will actually be able to afford. To qualify for this type of mortgage loan, a borrower's total monthly housing costs should not be more than a total of 29% of their gross monthly income.
Consider all the Costs
To figure out the exact amount of housing costs, be sure to include the mortgage principal, interest, taxes on the property, and insurance costs to get what is referred to as PITI, which stands for principal, interest, taxes, and insurance. Your total monthly obligations, the PITI, and any long-term debts, such as car loans, should equal no more than 41% of your income.
Qualifying for an FHA Loan
There are several required steps that must be taken in order to be qualified for FHA loans. First, a credit check must be conducted for the lender to see that you meet your current obligations. Next, the lender will want to ensure that you have enough income to make your monthly mortgage payments, along with the rest of your debts.
A borrower must also have enough cash on hand to make a down payment at the time of the loan's closing, yet another bit of criteria that must be met, having enough to pay the closing costs, which are generally anywhere from two to three percent of the home's price. Closing costs include fees such as attorney's fees, fees to cover the title search and title insurance, as well as homeowner's insurance, and private mortgage insurance if you have less than 20% to put down on the loan.
