The Department of Housing and Urban Development (HUD) recently published a new handbook pertaining to FHA home loans. HUD’s Single Family Housing Policy Handbook 4000.1 will become effective on September 14, 2015. So the guidelines it contains will apply to all FHA purchase loans through fall of 2015 and into 2016.
Among other things, the new handbook clarifies the loan-to-value (LTV) ratio limits for FHA loans in 2015 and beyond. Generally speaking, purchase loans are limited to a maximum LTV of 96.5%, for a down payment of 3.5%. This is the same as the current limit, though HUD has provided some additional guidance that borrowers may find useful.
FHA Loan-to-Value (LTV) Limits for 2015 – 2016
Let’s start with a definition. The loan-to-value ratio, or LTV, is used to show the ratio of a loan to the value of an asset being purchased. In this case, the asset is a home. So it’s the size of the mortgage in relation to the value of the home being purchased.
Most mortgage products have loan-to-value limits associated with them, and that includes the FHA loan program. This program is managed by HUD, which also establishes the LTV guidelines (and other criteria) for borrowers. Here’s what you need to know about FHA loan-to-value limits in 2015 and 2016.
Note: The information below applies to loans with case numbers assigned on or after September 14, 2015. But the 96.5% limit is also the current policy. (It will simply be carried over when the new handbook becomes effective in September.)
When it comes to FHA loans, the maximum LTV percentage is determined by the borrower’s credit score, the mortgage insurance program being used, and the type of transaction (i.e., purchase, refinance, or new construction).
According to HUD Handbook 4000.1, mortgage lenders must review the borrower’s credit reports and scores to determine the minimum decision credit score (with the exception of streamline refinance loans).
- If the borrower’s minimum decision credit score is at or above 580, the borrower is eligible for maximum financing. For purchase loans, that means the FHA loan-to-value ratio can be up to 96.5%.
- If the score is between 500 and 579, the borrower is limited to a maximum LTV of 90%. This means the borrower must make a down payment of at least 10%.
So the maximum LTV ratio for purchase loans is 96.5% of the appraised home value or purchase price, whichever is less. Refinance and new construction loans have different limits associated with them, as explained below.
New Construction: Residential properties that have been under construction or existing for less than one year are limited to an FHA loan-to-value ratio of 90%; unless the property (A) meets the pre-approval requirements outlined in the handbook, or (B) has a HUD-accepted ten-year protection plan in place.
Refinancing: In most mortgage refinance scenarios, the maximum LTV is 85% of the home’s adjusted value.
Additionally, special lending circumstances such as corporate transfers and tenant/landlord transactions have LTV limits of 85%. Refer to HUD Handbook 4000.1 for more information on these and other special circumstances.
Lower Down Payments Available These Days
The loan-to-value limit for FHA loans is essentially the inverse of the down payment requirement. For example, most borrowers who use this program are limited to an LTV of 96.5%. This means the loan cannot exceed 96.5% of the home’s value. Inversely, it also means home buyers must make a down payment of at least 3.5% of the purchase price or appraised value, whichever is less.
In the wake of the housing crisis, FHA was pretty much the only option for borrowers who wanted to keep their down payments below 5%. In those years, many mortgage lenders decreased their LTV limits (thus increasing their down-payment requirements) as a protective measure against financial losses.
Over the last couple of years, however, more and more lenders have begun offering down payments below 5%. So FHA is not necessarily the only game in town, when it comes to sub-5% mortgage loans. You can learn more about this trend here.
Disclaimers: This story contains FHA loan-to-value (LTV) limits for 2015 and 2016. The information above was adapted from official guidelines set forth by the Department of Housing and Urban Development. To learn more about LTV ratio limits and guidelines, you may refer to HUD Handbook 4000.1, the Single Family Housing Policy Handbook.