Reader question: “There is no way I can come up with ten or twenty percent for a down payment on a house, so I am leaning toward the FHA program. My question is, how much FHA loan can I borrow in 2014? Is it based on my income, the price of the house, or what? How do lenders decide how much I can borrow?”
There are three limiting factors you need to know about. They are the loan-to-value ratio, the HUD-authorized loan limit for your county, and the debt-to-income ratio. Put these three things together, and you’ll have a pretty good idea how much of an FHA loan you can borrow in 2014. Let’s start with some definitions of these three items.
- Loan-to-Value (LTV): When using the FHA program, home buyers are limited to borrowing 96.5% of the sale price or appraised value, whichever is less. This means you must come up with a down payment of at least 3.5%, the remaining amount. According to HUD Handbook 4155.1, “For purchase transactions, the maximum LTV is 96.5% (the reciprocal of the 3.5% required investment).”
- Loan Limits: The Department of Housing and Urban Development (HUD) establishes loan limits for each county in the United States. You can borrow as much as your local FHA loan limit, but no more than that. In most parts of the country, the limit is currently set at $625,500. Borrowers can exceed this amount in a handful of areas with higher building costs, such as Alaska, Hawaii and Guam.
- Debt-to-Income: When you apply for an FHA loan, the lender will measure your debt-to-income ratio, or DTI. This is simply a numerical comparison between the amount of money you earn each month, and the amount you pay toward your various debts. Current HUD guidelines state that your total debts (including the estimated monthly mortgage payments) should “not exceed 43% of the gross effective income.” But there are exceptions to this rule.
So there is a maximum loan amount for your county. The amount you can actually borrow, with an FHA loan, will depend on your current debt-to-income situation. Last but not least, there is a minimum investment on your part, in the form of a down payment. Borrowers must put down at least 3.5%, which may come in the form of a gift.
How much of an FHA loan you can borrow will depend on these three factors, above all else.
You Borrow from a Lender, Not the FHA
Just to be clear, you are not actually borrowing money from the Federal Housing Administration, or FHA. That agency does not act as a bank or lender. They merely insure the home loans made by “regular” lenders in the private sector.
For instance, you approach ABC Mortgage Company to apply for an FHA loan. They approve you and give you a certain amount toward the purchase or your home. The Federal Housing Administration (part of HUD) insures the lender for some or all of the amount they’ve loaned to you. If you default on your loan down the road, the lender will be reimbursed for losses by the FHA’s insurance fund.
It’s a common misconception that home buyers can borrow directly from the FHA (i.e., the federal government). But that is not the case.
Borrowing Rules in 2014: Multiply LTV by Sales Price or Appraised Value
The aforementioned HUD handbook explains how much you can borrow with a government-insured home loan in 2014, based on the LTV. HUD guidelines state that “the maximum mortgage amount that FHA will insure on a purchase is calculated by multiplying the appropriate loan-to-value (LTV) factor by the lesser of the property’s sales price … or appraised value.”
How much is the house worth, based on the appraisal? How much have you agreed to pay? Take the lesser of those two numbers and multiply it by 96.5% (.965), and you’ve determined how much you can borrow based on the LTV amount.
For example, if the home I want to buy appraises for $300,000, I can multiply that number by .965 to determine the maximum amount FHA is willing to insure. In this case, it comes out to $289,500. That means I must make a minimum investment (down payment) for the difference of $10,500. I am putting down 3.5% of the appraised value.
Of course, you have to start with the county-specific loan limits mentioned earlier. If you’re set on using an FHA loan to buy a house, there’s no reason to shop outside of the maximum approved price range for your area. You can find your local limit on the HUD website.
Disclaimer: This article answers the question, How much FHA loan can I borrow in 2014? The information above is based on current guidelines and criteria established by the Department of Housing and Urban Development. Due to the ongoing evolution of the FHA program, portions of this article may become less accurate over time. For the most current and accurate information about this program, refer to the official HUD website or speak to a HUD-approved housing counselor or mortgage lender.