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FHA Changes for 2019: Loan Limits Raised, Premiums Unchanged

Some important changes to the FHA loan program were announced last week. According to the Department of Housing and Urban Development (HUD), FHA loan limits for most U.S. counties will go up in 2019 in response to rising home values.

But program officials say there won’t be any reduction in FHA mortgage insurance premiums anytime soon. Here’s what you need to know about FHA loan changes for 2019.

FHA Loan Limits Increased for 2019

Home prices nationwide have risen steadily over the past year or so. As of December 2018, the median home value in the United States was $221,500. That was an increase of around 7.7% from a year earlier, according to Zillow. Prices are expected to continue rising in much of the U.S., throughout 2019.

As a result, federal housing officials have increased the conforming loan limits for most of the U.S. in 2019. VA and FHA loan limits will go up as well.

According to a December 14 press release from HUD:

“The Federal Housing Administration (FHA) today announced the agency’s new schedule of loan limits for 2019, with most areas in the country to experience an increase in loan limits in the coming year. These loan limits are effective for FHA case numbers assigned on or after January 1, 2019.”

In 2019, FHA loan limits will range from $314,827 to $726,525 for a single-family property. That’s the maximum mortgage size the Federal Housing Administration is able to insure.

There are exceptions for locations with higher construction costs, such as Hawaii, Alaska, Guam and the Virgin Islands. In these “special exception” areas, the FHA loan limit for a single-family property will be increased to $1,089,787 in 2019.

It’s important to note that these limits vary by county, since they are based on median home values. More expensive real estate markets (like San Francisco and New York City) have limits of up to $726,525. Other, more affordable markets tend to have lower limits.

So that’s the first FHA loan change for 2019. Borrowers will have a higher level of financing to work with next year, to go along with higher home prices.

The second announcement is more of a continuation of the status quo, rather than a policy change. And it has to do with FHA mortgage insurance premiums.

No Reduction in Mortgage Insurance Premiums

Borrowers who use FHA loans to purchase a home usually have to pay for mortgage insurance. With the FHA program, there are actually two of these premiums — upfront and annual.

During the end of his time in office, President Obama signed a measure that would have reduced the annual mortgage insurance premium for FHA loans. That reduction would have saved borrowers an average of $500 per year, according to officials. But it was later canceled by President Trump, shortly after he took office.

Over the past few months, some industry groups have urged HUD and FHA to lower the annual premium (as was previously planned). But that doesn’t appear likely during 2019.

During a November 2018 phone call with reporters, FHA’s Commissioner Brian Montgomery explained:

“We do have to be realistic about the fact that that is still a relatively thin margin. While the MMI Fund is sound at this point in time, I think we’re still far away from being in a position to consider any reduction in our mortgage insurance premiums.”

The “margin” he was referring to is the difference between (A) the capital reserve level that’s required by law and (B) the actual reserves in the fund. Those reserves are used to cover insurance claims from lenders, when borrowers default on their loans. 

So there you have them: one FHA loan change for 2019, and one non-change. Loan limits are going up in most counties across the U.S., but there doesn’t appear to be an insurance premium cut on the horizon.

Credit Score

Average Credit Score for FHA Borrowers Dropped to 681 in 2018

An October 2018 report published by CoreLogic (a housing analytics and research company) showed that the average credit score among home buyers using an FHA loan dropped to 681 during 2018. A few years back, during the first quarter of 2011, the average credit score among home buyers using FHA loans was 709.

This indicates that a higher percentage of borrowers with lower scores are using this particular program to finance their home purchases. It’s a trend that could continue into 2019.

Related: Mortgage denial rates have dropped

Average Credit Score Among FHA Home Buyers

CoreLogic’s study examined a variety of trends relating to mortgage underwriting standards, for both FHA and conventional home loans. Among other things, they discovered that the average credit score among home buyers using the FHA program has dropped steadily over the last seven years or so.

To quote the report:

“Since Q2 2011, the average credit score of homebuyers with FHA loans has declined steadily (709 in Q1 2011 to 681 in Q2 2018) making loans more accessible to borrowers with moderate credit history.”

In contrast, the average score among home buyers using a conventional mortgage loan has remained largely unchanged since 2009. It has hovered within the range of 758 – 763 over the last nine years or so.

Terminology: FHA loans are originated by mortgage lenders and insured by the Federal Housing Administration, a government agency. Conventional loans, on the other hand, are not insured or guaranteed by the government. That’s the primary difference between these two financing options.

So it seems that the credit standards used by mortgage lenders have eased over the years for FHA borrowers, while holding steady for conventional borrowers.

The key takeaway for borrowers is this. If you have a relatively low score, you might have an easier time getting approved for an FHA loan than conventional. But it’s still wise to explore all of your financing options.

How Low Can You Go?

The 680 credit score mentioned above is just the average among FHA home buyers for the second quarter of this year. The official minimum required score is quite a bit lower. But here, it’s important to understand the difference between the program requirements set forth by HUD, and the requirements of individual mortgage lenders.

The FHA loan program is managed by the Federal Housing Administration, which falls under the Department of Housing and Urban Development (HUD). According to HUD Handbook 4000.1, borrowers need a “minimum decision credit score” of 500 or higher to be eligible for an FHA loan. A score of 580 or higher is required for maximum financing, and to take advantage of the 3.5% down payment option.

But those are just the official minimums. Mortgage lenders can set their own standards for credit scores as well, and these can vary from one lender to the next. So the only way to know if you qualify for the program is by speaking to an FHA-approved mortgage lender (or more than one, ideally). Meeting the minimum credit score requirement, by itself, does not automatically qualify a borrower for this program.

FHA Borrowers Are Carrying More Debt as Well

The above-mentioned report also showed that the average debt-to-income (DTI) ratio has risen, among home buyers using this program. It said that the “DTI for FHA loans started to rise after Q2 2015 and had reached its highest level in at least 14 years during Q2 2018 at 43 percent, up from 42 percent in Q2 2017.”

This means that borrowers are qualifying for and using FHA-insured mortgage loans with a higher level of debt than before, on average. So there appears to be some easing in this area as well.

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Analysis: FHA Loans Most Popular in Rhode Island, Mississippi, Maryland

According to data collected by the Urban Institute, Rhode Island is the number-one state in the country for FHA loan usage. Mississippi and Maryland also had a relatively high percentage of FHA loans last year, compared to the nation as a whole.

FHA Loans Most Popular in Rhode Island, Mississippi & Maryland

The Urban Institute (an economic research group based in Washington, D.C.) conducts extensive research into various housing-related trends in America. Among other things, they gather data relating to the different kinds of home loans that are used by borrowers nationwide, and at the state level.

Their website offers an interactive map tool that gives insight into all kinds of housing and mortgage-related metrics. We used that tool to determine which states in the U.S. had the highest percentage of FHA loans (as a share of overall mortgage lending activity).

As it turns out, Rhode Island is the number-one state in the nation in terms of FHA loan usage by borrowers. According to the Urban Institute, 38.5% of home buyers in Rhode Island used an FHA loan in 2017. That’s quite a bit higher than the national average of 24.8% during the same period.

While Rhode Island had the highest percentage of FHA loans among U.S. states last year, the conventional home loan still reigned supreme. Nearly 55% of home buyers in that state used conventional mortgage loans to finance their purchases last year.

Here’s the basic difference between these financing options:

  • FHA loans are insured by the government, via the Federal Housing Administration. Borrowers must make a down payment of 3.5%. Mortgage insurance is required and might have to be paid for the “life” of the loan.
  • Conventional loans are not insured or guaranteed by the government. Eligible borrowers could make a down payment as low as 3%. Mortgage insurance is typically required when the loan-to-value ratio is above 80%, but it can usually be canceled when the homeowner reaches 80% equity.

Mississippi and Maryland also had a relatively high percentage of FHA loans used by home buyers in 2017. FHA-insured mortgage loans accounted for 33.6% of all purchase loans in Mississippi last year, and accounted for 31.4% in Maryland. The national average was 24.8%.

Other Insights About Loan Programs

The Urban Institute’s interactive map reveals other insights regarding the type of home loan used in states across the country. Here are a few notable highlights:

  • Alaska and Hawaii had the highest percentage of VA loans last year, followed by Virginia. At 4.3%, the state of New Jersey had the lowest percentage of home purchases backed by a VA loan.
  • Among U.S. states, Wisconsin had the highest percentage of conventional loans among home buyers who purchased a property in 2017. Conventional mortgage financing accounted for 73.8% of purchases in Wisconsin last year.
  • Alaska, West Virginia and Mississippi had the highest percentage of low-down-payment home purchases (i.e., those with an investment of 3.5% or below).
  • On average, down payments were highest in Washington, D.C., California and Oregon. In those states, the percentage of home buyers who put down 20% or more was higher than all other states.
  • Among U.S. states, New York, Connecticut and New Jersey had the highest percentage of first-time buyers last year. In all three of those states, about 60% of home purchases in 2017 were made by first-time buyers.

Note: The Home Buying Institute offers a number of tutorials and explainers on the different types of loans that are available these days. Here’s a good starting point for additional research.

Trump & Housing: President Hammers Middle Class With FHA Insurance Reversal

President Donald Trump, who paints himself as a champion of the middle class, hammers middle-income home buyers with FHA policy reversal.

Within hours of being inaugurated, Donald Trump took a swipe at low-income and middle-class Americans — many of whom voted for him — by scrapping a planned mortgage fee reduction for FHA loans.

In January, then-president Barack Obama approved the reduction, which would have saved FHA borrowers an average of $500 per year. But the mortgage insurance reduction was short-lived. In one of his first acts as president, Donald Trump decided to keep FHA mortgage insurance rates at the higher level.

As a result of Mr. Trump’s decision, home buyers who use FHA loans in 2017 (and possibly beyond) will continue to pay the higher premium, and some will simply be priced out of owning a home.

It was a strange move for a brand-new president who, while on the campaign trail, often painted himself as a champion of the middle class. The Home Buying Institute views Trump’s policy reversal as an error in judgment, and an unnecessary shift given the FHA’s current financial health.

Here’s how we got to this point.

FHA Insurance Fees Were Raised After the Housing Crisis

The Federal Housing Administration (FHA) insures home loans made by mortgage lenders in the private sector. This insurance protects lenders against financial losses that result when homeowners default and stop making their mortgage payments.

The FHA suffered tremendous losses during the housing market collapse and subsequent recession. They paid out so many insurance claims to mortgage lenders that their capital reserves were wiped out.

In order to restore their capital reserves, which are required by Congress to stay a certain level, the FHA raised its mortgage insurance fees starting in 2014. This, along with other policy changes, helped put the FHA back into the black and restored the agency’s capital reserves to the required level.

In 2016, the Department of Housing and Urban Development (HUD) reported to Congress that the FHA’s Mutual Mortgage Insurance Fund capital ratio rose to 2.32%, and that it “exceeded the congressionally required 2 percent threshold.”

HUD and Obama Reduced Fees When FHA Recovered

Now jump ahead to January 2017. During that month, HUD officials, with a blessing from the Obama administration, announced they would reduce the annual mortgage insurance premium home buyers pay when using FHA loans.

The reduced insurance rate would have applied to most borrowers using the program to buy a home in 2017, saving them an average of $500 per year (though sometimes much more than that).

Essentially, HUD and President Obama were bringing the Federal Housing Administration back in line with its primary purpose — to make homeownership more affordable to more Americans, particularly those in the lower and middle income brackets, and those with less-than-perfect credit scores.

But thanks to Donald Trump, the FHA insurance fee reduction never came to pass. This will affect the housing market in 2017 by reducing access to mortgage financing.

Donald Trump Scrapped It Shortly After Taking Office

On his first day in office, Donald Trump halted the planned reduction in FHA mortgage insurance. Trump’s executive order, signed within hours of his inauguration, kept the cost of government-backed mortgage insurance at the elevated level put in place after the housing crisis. In other words, it prevented FHA insurance premiums from dropping back down to pre-crisis levels.

Trump offered no explanation for the move. It happened swiftly and without any fanfare, below the radar of average Americans. Perhaps it was part of his often-touted plan to eliminate “all things Obama.” Maybe it was the brainchild of Stephen Bannon, Trump’s top advisor who wants to dismantle what he refers to as the “administrative state.”

It’s hard to say what the true motivation was, given the current administration’s penchant for misinformation and “alternative facts.”

Trump’s controversial housing market decision could affect a large number of moderate-income and middle-class home buyers in 2017, because the FHA loan program is very popular among this demographic. The Federal Housing Administration backed about 17% of all mortgage loans made in the U.S., according to the most recent figures published by HUD. Most of those were first-time buyers seeking a low down payment (FHA allows for a down payment of 3.5%).

Add to this the fact that home prices have been rising across the country in recent years, and you essentially have a plan for reduced homeownership among the lower and middle income brackets.

According to Laurie Goodman, co-director of the Housing Finance Policy Center at the Urban Institute: “The FHA does a disproportionate amount of loans for first-time buyers, minority buyers, low-income buying; it’s hugely important.”

The National Association of Realtors (NAR) estimated that 30,000 to 40,000 Americans who would have been able to afford a home purchase with the anticipated lower fee will now be unable to buy a house. Another 700,000 to 800,000 buyers will end up paying more for their mortgage insurance than they would have if the Obama-era reduction had been allowed to take place.

The NAR has since lobbied the Trump administration to reinstate the premium cut “as soon as possible.”

It is somewhat ironic that Donald Trump scrapped the insurance reduction. During his presidential campaign, he often lamented about how the middle class in American was getting “crushed.” Why, then, would he sign an executive order to crush them further?

FHA Annual Mortgage Insurance to Go Down in 2017, HUD Says

Federal Housing Administration officials announced today that they will reduce the annual mortgage insurance premium for FHA loans by a quarter of a percent.

The lower MIP rate will apply to most borrowers who use the FHA program to buy a home in 2017, and will save them an average of $500 per year. The lower insurance premium takes effect on January 27, 2017.

FHA to Reduce Annual Mortgage Insurance Premium (MIP) in 2017

Rising home values and mortgage rates have put the squeeze on home buyers lately, and have reduced mortgage loan application volume as well. Borrowers who use the FHA loan program have another added cost, in the form of an annual mortgage insurance premium, or MIP.

As a result of rising housing costs, and the added burden of the annual MIP, FHA loan application volume has been on the decline lately. So federal housing officials are making a change to attract more borrowers.

On January 9, 2017, the Department of Housing and Urban Development (HUD) announced that it would reduce the annual mortgage insurance premium for most FHA loans in 2017. As HUD officials stated, this is a modest reduction that “expands credit access and reflects improved economic health of FHA.”

The Federal Housing Administration will lower its annual mortgage insurance premium (MIP) by 25 basis points, or 0.25%. This reduction will apply to most new mortgage loans with a closing / disbursement date on or after January 27, 2017.

The first HUD mortgagee letter of 2017 was sent out to lenders earlier today, with additional details about the annual MIP reduction. To learn more about this FHA program change, refer to HUD Mortgagee Letter 2017-1, which is available online in PDF format.

Here’s a screenshot from the official policy change letter, which shows the current annual MIP as well as the reduced premiums that will take effect later this month. Note the “New MIP” column in this chart.

FHA annual MIP chart

HUD Feeling Good About Agency’s Economic Health

The reduction in FHA annual mortgage insurance premiums reflects the agency’s improved economic health. According to HUD officials, FHA’s Mutual Mortgage Insurance Fund (MMIF) has grown for the last four years in a row. The MMIF was basically wiped out during the last housing crisis, as FHA paid out one insurance claim after another.

Over the last few years, HUD has used higher mortgage insurance premiums and other actions to restore the FHA’s funds. The MMIF has gained $44 billion in value since 2012 and now exceeds the requirements mandated by federal law, according to the latest assessment.

In a related press release, HUD Secretary Julian Castro said:

“After four straight years of growth and with sufficient reserves on hand to meet future claims, it’s time for FHA to pass along some modest savings to working families. This is a fiscally responsible measure to price our mortgage insurance in a way that protects our insurance fund while preserving the dream of homeownership for credit-qualified borrowers.”

Learn more: Do you have questions about the reduced FHA mortgage insurance premium (MIP) rates for 2017? Refer to HUD Mortgagee Letter 2017-1, which was published on January 9th. It’s available on the Department of Housing and Urban Development website and can be found with a Google search.

FHA Changes: Higher Loan Limits for 2017

On December 1, 2016, the Department of Housing and Urban Development (HUD) announced the revised FHA loan limits for 2017.

The maximum loan limits for purchase mortgages were increased in most counties across the U.S., and will remained unchanged in some counties. There were no counties with a decrease. Next year, FHA loan limits for a single-family home will range from $275,665 to $636,150. Those are the “floor” and “ceiling” amounts.

Visit FHAhandbook.com for a full list of FHA loan limits by county.

Fast Facts: 2017 FHA Loan Limit Changes

Here’s an overview of the recent changes to FHA loan limits, effective in 2017.

  • FHA loan limits vary by county, and they are partly based on the conforming caps established by the Federal Housing Finance Agency (FHFA). For instance, FHA’s minimum national loan limit “floor” for low-cost areas is typically set at 65% of the national conforming amount for the U.S.
  • For most counties across the country, the 2017 FHA loan limit for a single-family home mortgage will be $275,665. This is what HUD refers to as the “floor.”
  • In more expensive real estate markets (such as San Francisco, New York City, and the Washington, D.C. metro area), the single-family FHA loan limit can be as high as $636,150. This is the “ceiling.”
  • There is obviously a broad spectrum between the floor and ceiling figures mentioned above. For these “in-between” counties, FHA loan limits can vary widely as a result of variances in home prices. (You can use the FHAhandbook.com link provided above to find the caps for your county.)
  • Within each county, there are higher limits for multi-family properties, such as duplex and triplex units.
  • The FHA limit changes mentioned above will apply to mortgage loans with case numbers assigned on or after January 1, 2017. They will remain in effect until the end of that year. (They are reviewed and reconsidered every year.)
  • Though they are technically set at the county level, both conforming and FHA loan limits are generally the same across entire metropolitan areas. For instance, there is a single limit for the entire Seattle metro area, even though it encompasses three separate counties.

A Response to Rising Home Prices

These FHA changes are a direct result of rising home values across the U.S. As mentioned above, the Federal Housing Administration’s loan limits are based on the conforming caps set by the Federal Housing Finance Agency. The FHFA, in turn, bases its limits on median home prices.

So when home values rise significantly during the course of a year, we often see a corresponding change with both FHA and conforming loan limits.

This is exactly what occurred during 2016. According to the real estate information company Zillow, home prices across the U.S. rose by more than 6% from December 2015 to December 2016. During the same 12-month period, double-digit gains were reported in red-hot real estate markets like Dallas (19%), Portland (17%), and Seattle (14%).

In short, these 2017 FHA changes are a result of higher housing costs.

Helping Home Buyers Since the 1930s

The Federal Housing Administration’s loan program was established by the National Housing Act of 1934. It was part of President Franklin D. Roosevelt’s “New Deal” program, established during the Great Depression. The goal was to make housing and mortgage loans more affordable to Americans, particularly those of low to moderate incomes.

The FHA loan program is unique in that it provides federal insurance for home loans made within the private sector. Mortgage lenders who participate in the program receive insurance protection against borrower default, as long as they meet certain lending criteria.

As a result of this government backing, FHA lenders are often more lenient with their qualification criteria for borrowers (credit scores, debt ratios, etc.).

Aside from loan limits, HUD has not announced any other major changes to the FHA program for 2017. Nor do we expect any. The minimum down payment for an FHA-insured mortgage loan will likely remain at 3.5% through the end of 2017, where it has been for the last few years.

Some Housing Markets Are Getting Too Expensive for FHA Loans

FHA loans are one of the most popular mortgage financing products for home buyers these days. They’re especially popular among first-time buyers, who often lack the funds for a large down payment. (FHA allows for a down payment as low as 3.5%.)

But with home prices rising steadily across the country, some housing markets are becoming too expensive for a Federal Housing Administration-insured home loan. In such markets, buyers often have a hard time finding a house that falls within FHA loan limits. This makes the program less viable for borrowers in cities like San Jose, Seattle and Manhattan.

FHA Loan Limits Max Out at $625,500

FHA loans are insured by the federal government. The program is managed by the Department of Housing and Urban Development (HUD). That department is also responsible for establishing loan limits for borrowers. These limits vary by county and are based on home prices in the area.

In 2016, FHA loan limits range from $271,050 to $625,500, depending on location.

But in some U.S. cities, average and median home prices have risen well above the loan limits for the surrounding county. In such areas, borrowers could have a harder time finding a suitable property within the FHA’s lending limits.

Expensive Housing Markets Reduce Loan Options

Take the San Francisco Bay Area for example. A recent blog post by Bay Area-based Bridgepoint Funding noted that the median home price in Alameda County is more than $100,000 above the FHA loan limit for that county.

As the author stated: “home buyers in the county might have a harder time finding a suitable property within FHA limits, when compared to borrowers in neighboring Contra Costa County [where average home prices are lower].”

This is true for an ever-growing list of cities in America, and it’s a direct result of rising home prices. Over the last few years, house values have risen sharply in some parts of the country. And while the median price in most counties is still below FHA loan limits, there are a number of counties where prices have climbed above those limits.

It’s not limited to the notoriously high-priced California housing markets either. In Seattle, Washington, for example, home prices have skyrocketed over the last few years. Zillow reports a 17% jump in the last year alone, with additional gains expected over the next 12 months. As a result, median house values in the Seattle metro area are now well above the FHA loan limits for surrounding King County. The county’s loan limits were increased from $517,500 in 2015 to $540,500 in 2016, in response to rising house values. But the higher limit is still well below median home prices in Seattle.

According to a March 2016 article in The Seattle Times: “Single-family home prices in the city … jumped 24 percent over the year to a median $644,950.” That’s about $100,000 higher than the loan limit for this area. Seattle is now on a growing list of cities where FHA loans are become harder to work with.

This doesn’t mean home buyers in places like Seattle and the Bay Area can’t use FHA loans to purchase a home. It just means they’ll have to cast the net wider to find a property that meets their needs and falls within FHA limits. Or else they’ll have to use a jumbo loan.

Higher Caps Possible in 2017

According to HUD, the Federal Housing Administration loan limits are based on the “median sale price value for each jurisdiction.” In some cases, HUD will increase the limit for a particular county from one year to the next, in response to rapidly rising home values. They did this for 188 counties from 2015 to 2016, while all other counties were unaffected.

There’s a chance they will announce another round of loan limit increases in December 2016, resulting in higher caps for some counties in 2017. This would make the program more appealing to a larger number of home buyers, especially in those areas where house values currently exceed FHA loan limits.

Sorry Manhattan, San Francisco and San Jose … you’ll probably never be FHA-friendly.

FHA Down Payment Requirements in 2016, According to New Handbook

There’s a new handbook for FHA loans, and it outlines the down payment rules and requirements for home buyers who want to use the popular program. In 2016, the minimum down payment for an FHA-insured mortgage loan will remain at 3.5%, the same as last year.

The new handbook also provides guidelines for borrowers who want to use down payment money donated by a friend or family member, or from some other approved third-party source. Here’s an updated look at FHA down payment requirements and gift guidelines for 2016.

Minimum Down Payment for FHA Loans in 2016: 3.5%

Borrowers who use an FHA loan to buy a home in 2016 must make a down payment of at least 3.5%. This is the minimum requirement for the borrower’s investment.

In its new handbook, the Department of Housing and Urban Development (HUD) explains the maximum loan-to-value (LTV) ratio that is allowed for FHA-insured mortgages: “For purchase transactions, the maximum LTV is 96.5 percent of the Adjusted Value,” the handbook states.

Borrowers can obtain an FHA loan up to 96.5% of the appraised home value or the purchase price, whichever is less. This means they must pay the remaining amount out of pocket, in the form of a down payment.

But this out-of-pocket investment doesn’t necessarily have to come from the borrower. HUD allows a variety of third-party donors to contribute funds to the home buyer’s cause. The new handbook has some specific rules and requirements for these down payment “gifts” as well.

Gift Rules and Requirements: Hint, You’ll Need a Letter

So the minimum down payment requirement for FHA loans in 2016 is 3.5%. Those funds can come directly from the borrower, or from a number of “approved sources.” One of the benefits of using an FHA-insured mortgage is that the entire down payment can be in the form of a gift. So a person could finance a home purchase through this program using none of their own money.

The new HUD handbook defines a gift as “contributions of cash or equity with no expectation of repayment.”

Gifted funds can come from a borrower’s relative — that’s the most common source. But it’s not the only one. Charitable organizations, employers, and labor unions are also acceptable sources for FHA down payment gift funds. A close friend can also contribute money to be used for the upfront investment, as long as the donor has a “clearly defined and documented interest” in the home buyer / borrower.

Here’s the key requirement for FHA down payment gifts in 2016, regardless of where the money comes from. It must truly be a gift — and not a loan. In other words, the person donating the funds must not expect any form of repayment from the borrower. Furthermore, they must provide a signed letter to this effect, and the letter must be included within the FHA loan application file.

HUD Handbook 4000.1 states that the mortgage lender “must obtain a gift letter signed and dated by the donor and borrower that includes” (at a minimum) the donor’s name and address, his or her relation to the borrower, and the dollar amount of the down payment gift funds. It must also include a statement that no repayment is required.

Additionally, mortgage lenders must verify and document the transfer of money from donor to borrower. This is typically done with bank statements that show (A) the withdrawal from the donor’s account, and (B) the subsequent deposit into the borrower’s account. If the money is paid directly to the settlement agent at closing, the lender must verify the payment in accordance with HUD guidelines.

Same Requirements, New Packaging

Most mortgage lenders are familiar with these FHA down payment requirements, because they haven’t changed much in recent years. The new handbook consolidates and clarifies lending guidelines that were previously scattered across multiple handbook and policy letters, some of which are now outdated. That alone is an improvement. The guidelines are now more streamlined. But most of the requirements themselves are the same as last year. Same rules — new packaging.

Portions of the new handbook (officially known as the Single-Family Housing Policy Handbook) took effect in September of last year. So it covers all FHA purchase loans originated in 2016.

The new handbook can be downloaded in PDF format on the HUD.gov website. It’s also available through Allregs.com and FHAhandbook.com.

FHA Changes: 188 Counties With Higher Loan Limits in 2016

The Department of Housing and Urban Development recently announced changes to the FHA loan program that will take effect in 2016. These changes relate to loan limits, which are the maximum mortgage amounts for borrowers who use the FHA program. While most counties will have the same limits in 2016 as they did this year, 188 counties will see an increase next year.

View the 188 counties with increases (PDF)

Effective date: This change applies to all FHA loans with a case number assigned on or after January 1, 2016, and it will remain in effect through the end of that year.

Higher Home Prices Bring FHA Changes in 188 Counties

Generally, the FHA loan limit for a certain county is calculated at 115% of the median home price in the county. So when home prices rise significantly in a particular area, HUD increases the local loan limits as well.

But it doesn’t always work this way. In some areas, home prices rise marginally or not at all, resulting in a “carryover” situation with no changes to the FHA loan limits. This was the case for most U.S. counties when HUD reviewed home-price increases for 2015.

But in 188 counties, house values rose enough to justify an increase in loan limits. Those 188 counties can be found in the PDF (hyperlink) provided above, and also on FHAhandbook.com.

According to HUD officials: “Due to changes in housing prices, the maximum loan limits for forward mortgages increased in 188 counties.”

These FHA changes will affect approximately 40 metro areas and a few smaller cities. These are areas where home values rose significantly over the last year or so, enough to warrant higher maximum mortgage amounts.

Cities & Metro Areas With Higher Loan Limits in 2016

FHA loan limits were increased from 2015 to 2016 for about 43 cities and metro areas (and their surrounding counties). Here is a partial list of cities and metros that will have higher limits in 2016:

  • Anchorage, AK
  • Austin-Round Rock, TX
  • Bend-Redmond, OR
  • Bismarck, ND
  • Boston-Cambridge, MA
  • Boulder, CO
  • Charleston, SC
  • Charlotte-Concord, NC
  • Crestview-Fort Walton Beach, FL
  • Dallas / DFW, TX
  • Denver-Aurora, CO
  • Destin, FL
  • Durango, CO
  • Durham-Chapel Hill, NC
  • Fort Collins, CO
  • Greeley, CO
  • Heber, UT
  • Houston, TX
  • Indianapolis-Carmel, IN
  • Jackson, MS
  • Jacksonville, FL
  • Juneau, AK
  • Louisville, KY
  • Madison, WI
  • Midland, TX
  • Minneapolis-St. Paul, MN
  • Missoula, MT
  • Napa, CA
  • Nashville, TN
  • Portland, OR
  • Provo, UT
  • Raleigh, NC
  • Riverside-San Bernardino, CA
  • Salinas, CA
  • Salt Lake City, UT
  • San Diego, CA
  • Santa Rosa, CA
  • Seattle, WA
  • Springs, WY
  • St. George, UT
  • Stockton-Lodi, CA
  • The Villages, FL
  • Tuscaloosa, AL

Notes: In the list above, we have used the simplified name of some metro areas. For instance, instead of referring to the “Nashville-Davidson-Murfreesboro” metro area, we have simply labeled it as “Nashville.” This is not an official list. For the complete list of 188 counties with FHA changes in 2016, see the HUD document hyperlinked at the top of this article.

No Other Major Changes on the Horizon, for Now

The Department of Housing and Urban Development frequently makes changes to the FHA loan program. But most of their changes are administrative in nature (such as reporting and filing procedures).

We have no indication that HUD will make any major FHA changes during the first part of 2016. Typically, such events are announced well in advance to allow for a public comment period.

So for the most part, the FHA program in 2016 will look much like it did in 2015:

  • Borrowers still have to make a minimum down payment of 3.5%.
  • Borrowers still have to pay upfront and annual mortgage insurance premiums.
  • Borrowers still have to apply through a HUD-approved mortgage lender.
  • Borrowers still need to have decent credit to get approved for the program.

Changes to the FHA loan program are typically announced in the form of a Mortgagee Letter and are published on the HUD.gov website. A total of 29 letters were issued during calendar year 2015 (as of December 13). The two most recent policy letters, Mortgagee Letters 15-29 and 15-30, had to do with the above-mentioned FHA loan limit increases.

FHA Minimum Credit Score Could Be Too Low for Lenders in 2016

Many home buyers who choose the FHA loan program are surprised to learn their credit scores are below the mortgage lender’s minimum cutoff, even though they meet the Federal Housing Administration’s official requirements. It happens fairly often, in fact, and it has to do with something called “overlays.”

According to the Department of Housing and Urban Development (HUD), which oversees the FHA program, borrowers need a credit score of 500 or above to qualify for an FHA loan in 2015 – 2016. However, to take advantage of the 3.5% down payment option, borrowers need a score of 580 or higher. But both of those numbers can be a moot point when mortgage lenders set the bar higher, as they often do.

In other words, the official FHA minimum credit score is sometimes too low for lenders.

How FHA Loans Work, Briefly

The Federal Housing Administration (FHA) does not lend money directly to home buyers pursuing a mortgage. Instead, they simply insure loans that are generated by lenders in the private sector.

It works like this. You approach ABC Mortgage Company to apply for an FHA loan. After reviewing your credit and income situation, the lender gives you the money you need to buy the house. The FHA, a federal agency that operates under HUD, insures ABC against financial losses that might occur if you default on (stop paying) your loan.

So while the FHA establishes the minimum credit score guidelines for the loan program, the lender can impose its own guidelines as well. They are the one lending the money, so it’s ultimately their call. And their guidelines might be stricter than those set by FHA. This is known as an “overlay” in industry jargon.

Minimum Credit Scores for 2016

The Department of Housing and Urban Development recently published HUD Handbook 4000.1, also known as the Single Family Housing Policy Handbook. This is the newly revised and official guide to FHA loan requirements and guidelines. Most of the handbook took effect in September 2015. Among other things, it explains the minimum credit score requirements for FHA loans in 2016.

  • The absolute minimum is 500. To be eligible for the program, borrowers need to have a credit score of 500 or higher. Anything below that, and you are not eligible for the program.
  • Home buyers with scores ranging between 500 and 579 are “limited to a maximum LTV of 90%.” This means they must make a down payment of 10% of the purchase price / appraised value.
  • FHA borrowers with scores of 580 or above are “eligible for maximum financing,” according to HUD. This means they can finance up to 96.5% of the purchase, for a out-of-pocket down payment of only 3.5%.

Lender Overlays Can Be Even Higher

But here’s where those overlays comes into the picture. Home buyers with credit scores as low as 500 will likely have trouble qualifying for an FHA loan in 2016, even though they might meet the official cutoff. That’s because lenders can impose their own minimum scores, and their cutoff points are often higher than HUD’s minimum.

In the lender’s view, a borrower with a score of, say, 500 or 510 is a high-risk borrower. Scores usually drop into this range as a result of late payments, delinquencies, foreclosures, or other credit-related problems. In the lender’s view, these are all red flags that indicate a higher level of risk.

To make things even more complicated, different lenders have different standards for minimum FHA credit scores. It varies from one company to the next. Some set the bar at 580, while others might require a 620 or higher. The only way to find out is to ask a loan officer or apply for a loan.

Related: Quicken Loans says it will go as low as 580

At the beginning of 2015, the Home Buying Institute conducted an informal email survey of mortgage lenders across the U.S. The goal was to find out what kinds of scores they’re looking for, when qualifying applicants for FHA loans. While the standards varied from one company to the next, most of them wanted to see a minimum score of 600 – 620. We will conduct a similar survey at the beginning of 2016.

Average Score for Closed Loans in October: 687

Ellie Mae, a company that provides software for the lending industry, publishes an “Origination Insight Report” each month. The report compiles data from a “sampling of approximately 66 percent of all mortgage applications that were initiated on the Encompass origination platform.” As a result, it offers valuable insight into mortgage underwriting standards.

According to the company’s latest report, the average FICO credit score for closed (successful) FHA purchase loans in October was 687. That was the average for purchases, meaning loans that are used to actually buy a home. The average FICO credit score for FHA refinance loans was 654 in October. The average score for purchases has been fairly steady all year. The average for refinance loans, on the other hand, has dropped by 20 points since the beginning of 2015 (when it was at 674).

Note: This doesn’t mean borrowers need a credit score of 687 to buy a home with an FHA loan. It just means that the average score among closed loans was in that range. Still, it does give us some additional insight into the often murky world of mortgage underwriting.

The bottom line: Meeting the FHA’s requirements is not enough. You must also measure up to the mortgage lender’s guidelines, and these are often more strict than those set by the Federal Housing Administration.

Disclaimers: This story addresses the minimum credit score for FHA loans in 2016. This article was updated and fact-checked in November 2015, to reflect current program guidelines. For the latest and most accurate information on this loan program, we encourage you to visit the official HUD website at www.HUD.gov. Portions of this story were adapted from HUD Handbook 4000.1, which is available online. The information above may become outdated over time, so please refer to the official source(s) to learn more about this topic.