The FHA loan offers a flexible financing option to low and middle-income borrowers. Just how much can you borrow? The FHA purchase loan allows up to a 96.5% maximum LTV in most cases. There are exceptions to the rule, though. We look at the important details below.
The 3.5% Down Payment
Generally, borrowers must put down 3.5% of the purchase price of the home. The money can be their own or from an approved gift. For example, if a home sells for $150,000, you would need a down payment of $5,250.
This money can come from your savings, checking, or other liquid investment accounts. It can also come from a relative, employer, or charitable organization that gives you the money, not lends it.
Let’s say your parents decided to help you with your home’s down payment. If they write a gift letter stating what the money is for and that it is not a loan, you may be able to use it for your down payment. There are no rules stating that you must put down a certain amount of your own money. The only restriction is that it cannot be a loan.
Understanding the Adjusted Value
There’s one key factor you must understand, though. You must know the adjusted value of the home. This is not the purchase price or the appraised value, in all cases. It depends on the circumstances. If the lender determines that there are any inducements to purchase, this lowers the adjusted value of the home.
Inducements to purchase are credits from the seller that exceed the FHA’s allowed seller concessions. As it is, sellers can contribute up to 6% of the sales price of the home towards closing costs, origination points, and discount fees. If, however, the seller exceeds that amount or contributes money towards any expenses that are not allowed, it comes directly off the value of the home.
Non-allowed expenses are anything to do with the home’s decorations, personal property, moving costs, or the real estate agent’s fees to sell the buyer’s current home. If the seller contributes to these or exceeds the 6% rule, the dollar-for-dollar deduction affects the home’s value.
Let’s say a seller exceeded the allowed contributions by $2,000. If the purchase price was $200,000, the adjusted value would be $198,000. Rather than giving you a loan amount of $193,000, you’d receive a loan amount of $191,070. Your 3.5% down payment is also figured on the adjusted value of $198,000.
Including the Upfront Mortgage Insurance
The FHA charges two types of mortgage insurance – upfront and annual. The upfront insurance, as the name suggests, is paid at the closing. However, you do have the option to include it in your loan amount. This does not affect your loan amount or your maximum LTV, though. The lender can still loan you 96.5% of the adjusted value plus the amount of your upfront mortgage insurance.
In the above example, you received a loan of $191,070. Your upfront mortgage insurance is 1.75% of that amount. In this case, this means $3,343. You can come up with this money on your own or wrap it into your loan amount. If you wrap it in, you’d have a loan of $194,413, which is actually 98% of the adjusted value.
Buying With a Non-Occupying Co-Borrower
Just when you thought you understood all of the FHA rules, there’s one more exception. You may buy the home with a non-occupying co-borrower. This means only you have to live in the home – the co-borrower does not. However, your relationship with this co-borrower will determine the maximum LTV you are eligible for with the FHA loan.
If the non-occupying co-borrower is a blood relative or a relative by marriage, you have the same LTV rules. You can borrow up to 96.5% of the adjusted value of the home. If you happen to buy the home with someone that is not a relative of any type (blood, law, or marriage), your maximum LTV for the FHA purchase loan is 75%. That’s a significant cut to what you can borrow.
In the above example, you would have to put down $49,500 rather than $6,930. Once you take into consideration the annual mortgage insurance and upfront mortgage insurance, it may not make sense to take FHA financing with a non-occupying, non-related co-borrower.
The FHA loan allows for flexible financing and a high maximum LTV. As long as you follow the rules and don’t buy the home with someone that isn’t related to you, the benefits are immense. Even lowering your home’s value if the seller’s concessions are too high can still leave you with an affordable loan with great terms.