It’s a new year — and that means new limits for certain loan types.
The Federal Housing Administration (FHA) has increased its base loan limits for 2021 by more than $24,000 over 2020’s limit of $331,760. The increase was driven by a booming real estate market, which at the end of the year saw five straight months of year-over-year double-digit price growth, according to NextAdvisor’s analysis of data from Realtor.com.
Even though FHA loan limits have increased for 2021, the loan amount isn’t the only factor that impacts your eligibility for an FHA-backed mortgage. You’ll still have to meet the FHA’s — and your lender’s — guidelines for credit score, debt-to-income ratio (DTI), and down payment.
What Is an FHA loan limit?
FHA loan limits are the maximum amount you can borrow with a mortgage backed by the FHA. These limits vary by county and are adjusted annually based on home values.
FHA loans are popular with first-time homebuyers and can be good options for low and moderate-income borrowers. “The FHA program has always been about, from its genesis, making homeownership more accessible,” says Barry Rothman, housing counseling program manager with the HUD-certified agency Consolidated Credit Solutions. Because these home loans are insured by the federal government, they’re considered less risky by lenders. This usually makes FHA loan rates better for homeowners with lower credit scores, compared to conventional mortgage rates.
What Are the Current FHA Loan Limits?
FHA loans may be used to purchase a primary residence, but you aren’t limited to a single family home. FHA loans can be used to purchase homes of up to four units, says Andrina Valdez, chief operating officer of Houston-based Cornerstone Home Lending.
In addition to the property’s location, the number of units will also impact the loan limit. Below the standard limit and maximum limit for high-cost areas are listed, although some areas of the country have limits that fall in between these two.
|Number of Units||Standard 2021 FHA Loan-Limit||High-Cost Area 2021 FHA Loan-Limit|
A handful of states and territories have special limits that can be adjusted up to 150% of the current maximum loan limits. For Alaska, Hawaii, Guam, and the U.S. Virgin Islands the 2021 FHA loan limits can be higher.
|Special FHA 2021 Loan Limits||$1,223,562||$1,579,500||$1,909,125||$2,372,625|
You can find the 2021 FHA loan limits for your area by searching the FHA mortgage limits page.
Factors Affecting FHA Limits in 2021
The FHA sets a range of limits each year, which are not the same as the conventional loan limits set by the Federal Housing Finance Agency (FHFA). “The FHA has its own set of limits, and they vary by county and ZIP code,” Valdez says.
FHA loan limits are based on the median home price of the area, and are usually a percentage of the conforming loan limit. The current FHA loan ceiling for low-cost areas is 65% of the conventional limit, which is $548,250 for one-unit properties.
How to Get an FHA Mortgage
The FHA doesn’t directly issue mortgages to consumers. Instead, it insures loans issued by private lenders, and there are other FHA loan requirements outside of the loan limits. The FHA’s guidelines include a minimum credit score of 500 if the down payment is 10% or more. For down payments that are less than 10%, and at least 3.5% of the purchase price, the minimum credit score requirement increases to 580.
While those are the minimum FHA standards, in reality you’ll need a higher credit score to qualify for an FHA loan. “Lenders have what are known as overlays, their own set of rules that they put on top of the FHA requirements,” Rothman says. Most lenders will require a much higher credit score, and the pandemic has only made it harder for borrowers. Last year, we saw the average credit score for FHA borrowers top 670, according to a December 2020 report by the Urban Institute.
Given how difficult getting a mortgage can be for some borrowers, it’s even more important to shop around for the best FHA mortgage lender. If you’re finding it difficult to qualify for an FHA loan right now, use the time to build your credit score and increase your savings. Having a higher credit score and larger down payment will not only help you get approved for a mortgage, but also increase your chances of qualifying for a lower interest rate.