If you need a flexible loan with guidelines with low credit score requirements and high debt ratio allowances, you may want to explore the FHA loan. This loan allows a credit score as low as 580 and debt ratios as high as 43% in some cases.
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Many people want to know just how much they can borrow with the FHA loan, though. Keep reading to find out how much you may be able to borrow.
FHA loans typically follow the conventional loan maximums. This year that means a maximum loan of $453,100. This is the case in most areas. However, there are some ‘high cost’ areas where you can borrow more than this because the cost of living is higher.
The Upper FHA Loan Limits
The FHA labels counties based on their cost of living and average home price. You’ll see low-cost counties, high-cost counties and average counties.
The limit for low-cost counties is $294,515. This is the most you can borrow in what the FHA considers a low-cost county. The limit for high-cost counties is $679,650. If your county doesn’t fall within the low-cost or high-cost counties, it will fall somewhere in between. This means your county will have a limit higher than the low-cost county, but lower than the high-cost county.
What do Loan Limits Mean?
So how does the loan limit affect you? Let’s say your county loan limit is $453,100. Does that mean that you can borrow that much?
It doesn’t. You have to qualify for the loan amount, which is a lot different than being eligible for it. You must qualify or prove that you have the credit score, income, and debt ratio to afford for the loan. Luckily, FHA loans have flexible guidelines allowing you some wiggle room.
In order to qualify for an FHA loan, you’ll need the following basic requirements:
- 580 credit score or higher – The FHA allows a credit score as low as 580, but not all lenders will allow it. Check with induvial lenders to find out their requirements.
- 31% housing ratio – The FHA allows you to have a housing payment that equals as much as 31% of your gross monthly income (income before taxes).
- 41% total debt ratio – The FHA allows you to have a total debt ratio that equals up to 41% of your gross monthly income. In some cases, lenders may allow as much as a 43% ratio.
- Stable income – You must prove that your income is stable and reliable. It helps if you’ve been at the same job for the last two years, but if you have a newer job, don’t worry. You just need to prove stability and reliability.
- 5% down payment – The FHA requires at least a 3.5% down payment on the home, but you can make the down payment from your own funds or gift funds from relatives or an employer.
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That’s all that the FHA really requires. It’s a flexible loan program for many. It’s not just a first-time homebuyer’s loan as many people think of the FHA loan. If you need flexible guidelines, you may qualify for this loan.
The FHA’s Role
Something to keep in mind is that the FHA doesn’t underwrite or fund the loan. Your lender is in full control of whether or not you get approved. The FHA approves certain lenders to write loans in their name. As long as the lender follows the FHA rules, the FHA will guarantee the loan.
The guarantee the FHA provides is for the lender. They promise the lender that they will pay them back a portion of the money that they lose should you default. Even with that guaranty, some lenders make the guidelines a little stricter. They add what’s called lender overlays. They make it a little harder to get the loan so that the risk of default decreases.
FHA loans have flexible guidelines and varying loan limits. You can find the loan limits for your county here or you can ask your lender. This will give you an idea if FHA financing will be a good option for you based on the price of the home that you want to buy.