The FHA loan offers flexible financing for borrowers with less than perfect credit. It’s a great solution for those that don’t qualify for conventional financing. However, you should know that you must determine the maximum loan amount for your area. FHA loans do not work like conventional loans that have a generic maximum amount you can borrow. FHA loans vary based on the area you live.
How the FHA Maximum Loan Amount Works
The FHA uses the conventional maximum loan amount as a guideline. For example, today that amount is $424,100. From there, they determine the ‘floor’ and the ‘ceiling.’ The floor is the lowest maximum loan amount in any area. The FHA gives low cost areas 65% of the maximum conforming loan limit. Today this means $275,665.
The ceiling is the highest loan amount the FHA allows. This is for high cost areas. The FHA allows 150% more than the conforming limit. Today, this means a maximum of $636,150. This only applies to certain areas considered high cost.
In all other areas, the maximum loan amount is between $275,665 and $636,150. You can find the maximum amount for your area here.
What Else Determines the Maximum FHA Loan Amount
The maximum FHA loan amount depends largely on where you live. However, that just provides you with the maximum amount you may be able to borrow. You must qualify for the amount, though. Whether you qualify depends on your gross monthly income and current liabilities.
The FHA has maximum debt ratio guidelines that are more flexible than conventional loans. Your front-end ratio can be as high as 31% of your gross monthly income. This means your principal, interest, real estate taxes, homeowner’s insurance and mortgage insurance can be as much as 31% of the money you make each month.
Remember, the FHA uses your gross monthly income. This is the money you make before taxes are taken out of your check. If your front-end ratio exceeds 31%, you may not qualify or you may need compensating factors, which we’ll discuss below.
Your back-end ratio can be as high as 43%. This includes your total housing payment plus any other monthly obligations you have. The FHA only considers the payments reporting on your credit report. Think of things like your credit cards, car payments, student loans, and personal loans. These monthly payments figure into your monthly debt ratio. The FHA does not have any leeway in regards to this ratio. A 43% debt ratio is the highest any loan can go in order to be a Qualified Mortgage. Most lenders only write Qualified Mortgages today.
A Qualified Mortgage means the lender made sure you can afford the loan by abiding by the QM rules. One of the largest rules within the guidelines is a 43% debt ratio. Anything beyond that amount puts borrowers at risk for default.
These guidelines are the FHA’s guidelines, though. You may find that some lenders require lower debt ratio requirements. The lender has full discretion on the debt ratio they will allow. However, if one lender has stricter debt ratio requirements, you can try another lender. We recommend trying at least three lenders even if you receive approval from the first lender. This gives you the chance to compare rates and fees to find the loan that is best for you.
As we discussed above, compensating factors may help if you have a slightly higher debt ratio. Compensating factors help make up for your risky factors. They help you get qualified for the loan. Every lender differs in the compensating factors they allow. However, some of the most common include:
- Reserves – Any money you have on hand that you can use as a ‘backup’ if you lose your income counts as reserves. This does not include money you need for the down payment or closing costs.
- Great credit – Despite the fact that you have a higher debt ratio, you can have a great credit history. If you don’t have any late payments or defaulted loans reporting over the last few years, it can help your case if you have a higher debt ratio.
- Lower LTV – FHA loans allow loan-to-value ratios up to 97.5%. However, if you put more than the standard 3.5% down, you lower your risk of default. Lenders are more likely to allow a higher debt ratio in this case.
General Qualifying Guidelines
In general, in order to get an FHA loan, you need a 580 credit score. You must also prove that you have funds for a 3.5% down payment at a minimum. The funds can be your own or funds from a relative, employer, or charitable organization as a gift. Under no uncertain circumstances can the funds be a loan, though.
Because lenders get to determine their qualifying requirements, you’ll find different lenders with different options. Shop around and find the lender that is right for you. However, the maximum loan amount is not a rule a lender can change. What you see on HUD’s website is the maximum amount you can borrow in any area.