What are FHA’s Loan Limits?

Want to buy a home—but without the part where you sell your soul to the bank? An FHA loan might be just what you’re looking for.

An increasing number of millennials, particularly younger millennials, are choosing the FHA loan as their go-to. And it’s no wonder—the federally-backed mortgage offers first time homeowners flexible qualification criteria, loans to suit a range of specific needs and property types, and low-down payments. 📉

But that’s not all—FHA approved loans offer borrowers protection too: most recently, the Department of Housing and Urban Development (HUD) extended a moratorium on evictions and foreclosures on FHA loans, saving many homeowners from a potentially hazardous outcome. It all sounds cozy, doesn’t it?

So what exactly are the downsides to an FHA loan? What will you need to qualify? And what exact FHA loan limits apply to you in 2021? We take you through all of this, and more, below.

How an FHA Loan Works 🏡

An FHA loan is a mortgage that is provided by the Department of Housing and Urban Development (HUD). More specifically, it is a loan that is backed by the Federal Housing Administration (FHA), an agency within the HUD. FHA loans are also insured FHA, meaning that lenders are protected from defaults.

With a minimum down payment of 3.5% for borrowers with a credit score of 580+, more first-time homeowners in need of some help are turning to FHA loans. 

Your FHA approved loan can be used in several ways: to buy or refinance a family house, condominium, or certain mobile homes. More than this, there are FHA loans available for more specific needs like new builds or for renovation purposes too. So far, so good, right?

Let’s recap the main aspects of an FHA loan:

FHA Loan Limits 👇

No matter the type of FHA loan you’re after, you will (unfortunately 🙁 ) be subject to certain limits (floor and ceiling). In 2021, FHA loan limits range from $356,362 to $822,375, and vary by county. The good news is that this is an increase of $24,602 on 2020’s limits. The bad news is that the increase is largely due to a rise in housing prices across the U.S. 

What are the FHA Loan Limits by County? 🌎

Wondering how much exactly you’re entitled to? To discover the FHA limit for a specific county, check out the HUD website directly. On top of the FHA limit, the HUD search engine also has some other interesting features that might catch your eye. When you search on the website, a table will come up showing you the average house price for the area you. With this, you can easily and quickly compare different areas.

It (almost) goes without saying, this will only give you a very broad look to start. Within this there are usually more counties around a big city that vary in average housing prices.

There is some disparity between limits in low-income areas and high-income areas. Single-family homes are subject to an upper limit of $356,362 in low-income counties, like Lucas County, Ohio. 

On the other hand, FHA’s limit for high-cost areas, like San Francisco County, California, comes to significantly more $822,375. There are counties that fall in the middle, too. For example, Denver County, Colorado, which has a limit of $596,850 for 2021.

FHA Limits (low cost areas)

FHA Limits (high cost areas)

How FHA Loan Limits are Determined

So, how are these loan limits even determined, you ask? Is it a straightforward process? Well, conventional loans insured by Fannie Mae and Freddie Mac have a standard loan limit, and VA loans are subject to the same criteria. FHA loans, on the other hand, follow a more complex process…

Basically, there are two main factors the FHA uses to determine lending limits: 1. where you reside, and 2. the property type you want to buy. Low-cost areas have a lower “floor”, and high-cost areas have a higher “ceiling”, as we briefly saw in our examples above.

To categorize areas into “high-cost” and “low-cost” the FHA takes into account the average income level, market demand, and average cost to buy a property. Houses in really populated areas like Los Angeles, therefore, will have a higher ceiling than more rural areas.

But lending limits can also differ depending on the property type. For example, a single-family home will have a lower lending limit than a two-unity, or four-unit home.

FHA Loan Types 🗂

When it comes to the variety of FHA loans, you have plenty to choose from: loans start from standard buying loans to ones designed to meet more specific needs. Below we have outlined some of the most common FHA loans used to purchase a home:

Qualifying for an FHA Loan ⭐️

Now for the big question: how exactly can you qualify for an FHA loan? Like any loan, there are specific requirements you will need to meet to qualify, including:

• The home in question must be FHA-approved.
• The property must be occupied within 60 days of closing.
• You can only qualify for a new FHA loan if the home in question is intended as your primary residence or second home.
• The property will need to be inspected, and the inspection should state whether the property qualifies for the minimum property standards.

On top of this, there are a few more conditions necessary to qualify. This includes your credit score, down payment amount, mortgage insurance, and property approval. We will take you through each below to give you a better idea of what’s involved.

FHA Credit Score Requirements 💳

When applying for any loan type, a good credit score will help your chances of qualifying significantly. FHA applicants are required to have a minimum FICO score of 580 to qualify for the low down payment advantage, which is about 3.5%.

If your credit score doesn’t currently match up to this, don’t worry, you’re not excluded from the FHA loan yet. Applicants with a lower credit score can still qualify by putting a 10% down payment. And if credit isn’t your strong suit, don’t worry—there are plenty of mortgage lenders for borrowers with bad credit.

So, if you’re planning on buying a house, and you’re yet to reach 580 or more, you can still qualify by putting down a larger down payment, or by checking out ways to boost your credit rating.

Joe Tyrrell, President of ICE Mortgage says that FHA loans are popular among millennials due to their flexible qualification criteria. In fact, out of all the loans millennials applied for, 16% were FHA loans. 

Tyrrell said, “FHA loans were especially popular among younger millennials under age 30… nearly a quarter of them chose this financing option, in part because of the more flexible qualification criteria.”.

Alternatively, there are more suitable personal loans for fair-credit borrowers out there.

Further, in December, the Department of Housing and Urban Development (HUD) extended a moratorium on evictions and foreclosures on FHA loans, offering first-time home buyers more protection.

FHA vs. Conventional Loan ⚖️

Now for the answer you’ve been waiting for: Which is better?An FHA loan or a conventional loan? Our advice: To figure out which loan is best for you will need to have a good grasp on your financial needs and situation.

That said, and in all fairness, an FHA loan has an added advantage because it has less-restrictive qualifications compared to a conventional loan, along with heightened loan limits.  

Additionally, you will need to have a higher credit score and down payment, and lower debt-to-income (DTI) to qualify for a conventional loan.

Lastly, both FHA and conventional loans have specific loan limits, and you might have to pay mortgage insurance for conventional loans but you will need to pay a Mortgage Insurance Premium (MIP) for an FHA loan. Here are some extra stats:

✔️FHA loans allow for lower credit scores than conventional loans and, in some instances, lower mortgage insurance.

✔️FHA rules are more liberal when it comes to gifts of down payment money from employers, charitable organizations, or family.

❌ FHA loan may have some closing costs that conventional loans may not.

How to Apply for an FHA Loan 📝

When applying for an FHA loan, you will need to provide the following documents:

• A valid Social Security number.
• Proof of U.S. citizenship, legal permanent residency or eligibility to work in the U.S.
• Bank statements going back at least 30 days.

Lenders can often retrieve some documentation automatically, like credit reports, employment records, and tax returns. In special cases, such as if you’re a student, or you don’t have a credit score yet, you might need to fill out a bit more paperwork. Don’t be intimidated here, the top mortgage lenders will help you along the way.

FHA’s Closing Costs 💰

We mentioned closing costs a little above. But it’s best we go into them a bit more now so you know exactly what you’re getting yourself into. If you qualify for an FHA loan, you can expect the following closing fees: mortgage insurance, lender and third-party fees, and some prepaid items when signing the paperwork for the mortgage. Below we break it down: 

Mortgage Insurance Premium

A typically mandatory fee is the FHA mortgage insurance premium (MIP). This comes to 1.75%, paid at closing. MIP can also be financed as part of your loan. 

You’ll also be charged an additional ongoing MIP fee of between 0.45% to 1.05% in your monthly repayments. 

The rate won’t change throughout your repayments, but the premium will be adjusted annually, depending on the remaining principal loan balance. For your information, mortgage insurance premiums are not something you will need to worry about paying on conventional loans, but you will need to make a down payment of 20% or above.

Lender Fees

Some lender fees you may be charged include:

• Origination fee
• Underwriting fee.
• Document preparation fee.
• Interest rate lock fee
• Supplemental loan origination fee  (only for FHA 203(k) renovation loans)

You’ll also have the option to buy some discount points: this is prepaid interest that reduces the interest rate on your loan. If low interest is a priority for you, check out what the top loans for low interest you can get online look like.

Third-Party Fees

This is a category of charges for services offered by other providers. These are mostly minor expenses, but you should ask your lender about them and include them in your calculations if you want to figure out the full cost of your FHA loan.

• Title insurance policy premium (for the lender and an option for the buyer to purchase as well).
• Notary fee.
• Credit report fee—this one is worth it because the loans you get with good credit can have much lower rates.
• Recording fees.
• Appraisal fee.
• Courier fee.
• Attorney fees.
• Flood certification fee.

Prepaid Items

There are some fees you will need to pay in advance—some will be shared between the buyer and seller. They include:  

• Flood and hazard insurance premiums.
• Tax and insurance escrow deposit.
• Per diem interest.
• Real estate taxes.

Reducing FHA Closing Costs 🎯

Closing costs can vary significantly depending on where you live—and they can turn out to be a real pain. Luckily, there are some nifty ways to reduce closing fees. 

Request that the seller pay some closing costs. The seller should pay their share of closing costs, including the real estate commissions, which can be a lot. You could also request that the seller pay some settlement costs, but whether this happens or not will probably depend on whether your local real estate market is active. Where demand exceeds supply, or in a “seller’s market”, you shouldn’t hold your breath.

Another money-saving idea could be to use a gift of cash from your family or a friend. With FHA loans, you can use a gift from friends or family, or even a charity or employer. You may also qualify for closing costs or down payment grant from state housing assistance programs. 

Lastly, why not finance some of your closing costs? Closing costs can be added to your loan balance which will help lower the upfront costs required. Note that this will increase your monthly repayments, though—and it could increase the interest on your loan too.