Federal Housing Authority (FHA) loan programs allow borrowers with bad credit or those with limited funds for a down payment to borrow up to 96.5 percent of a home's value through a government-sponsored mortgage program. However, the FHA establishes maximum lending amounts and uses maximum debt ratios based on your income to determine your individual borrowing limit.
FHA Loan Basics
The FHA is one of the largest government-sponsored mortgage programs, which is intended to keep the housing market moving by making mortgage financing available to home buyers that cannot get affordable loans with a conventional lender. Under the Housing and Urban Development (HUD) agency, the FHA insures loans for FHA lenders to offset their risk in offering financing to higher risk borrowers. Key benefits include a lower down payment requirement of 3.5 percent of purchase price, low closing costs and easier credit qualifying.
FHA Loan Limits
To protect its own interests, as well as the interests of lenders and borrowers, the FHA imposes caps on FHA loans in each region of the United States, according to the FHA Loan Pros website. Caps are adjusted every year and are intended to set maximum loan amounts suitable for areas based on relative home values. The FHA Loan Pros site notes that the highest limit for a one unit property in 2009 was $729,750. The lowest cap was $271,050, which was applied in many more affordable markets across the country. Consumers can search the HUD website by state and county find current limits for each area.
Another tool used in deciding how much you can borrow with an FHA loan is a common debt-to-income ratio. This is a ratio used to compare your monthly debt obligations, including car loan payments, credit cards and other personal debt, with your gross income. Whereas conventional lenders operate with a common guideline of a 36 percent maximum ratio, FHA allows for up to 41 percent of your income to go toward debt payments. Similarly, a mortgage-to-income ratio established a maximum portion of your income to go toward a house payment. Banks usually operate with a standard cap of 28 percent mortgage-to-income. FHA lenders allow for 29 percent. Thus, you can take 29 percent of your monthly gross income to get an idea of your maximum allowable monthly mortgage payment.
An additional, important consideration in deciding whether to get an FHA loan is its required mortgage insurance. This is insurance that covers your mortgage payments if you involuntarily lose your job and cannot make payments. This requirement is included to protect the lender, the program and you. However, it does add roughly 1 percent to your monthly mortgage payments, which is a main reason maximum debt ratio levels are higher for FHA loans.