Summary: With today’s rising home prices, FHA loan limits are becoming more important than ever. Find out what they are and what it means when exceeding a county loan limit.
What are loan limits?
The Federal Housing Administration (FHA) establishes a maximum loan amount, or loan limit, that it will insure. This is known as the FHA lending limit. These loan limits are calculated and updated annually. The values established are influenced by the conventional loan limits set by Fannie Mae and Freddie Mac. The type of home, such as single-family or multi-family duplex, can also affect these numbers.
Home buyers should be aware that there are two separate loan limits: conventional loan limits for conforming loans (Freddie Mac/Fannie Mac) and FHA loan limits. Typically, FHA loan limits are higher. Refer to the article titled, “What is the difference between a conventional loan and FHA loan?” for more details on the differences between these loan types.
Loan limits are established per year but may be increased based on the median home price within a county. The loan limits were increased for 2021 to reflect the increase in home prices across the country.
How does the FHA loan limit impact my home buying power?
Lenders are unable to provide a home loan for an amount that exceeds the loan limit for your county. This means that your total purchasing power, excluding closing costs, is the sum of your down payment and the loan limit for your loan type.
FHA Loan Limit Example: For Harris County, TX, the 2021 FHA loan limit is $548,250. To purchase a home for $625,000 it would require a minimum down payment of $76,750 plus closing costs.
Conventional Loan Limit Example: For Harris County, TX, the 2021 FHA loan limit is $356,362. To purchase a home for $625,000 it would require a minimum down payment of $268,638 plus closing costs to qualify for the loan.
For some counties, home prices are still low enough to not reach the loan limits. However, larger homes or homes on larger lots may increase the sale price and therefore will meet or exceed the loan limit. This will require a higher down payment to keep the loan amount at or below the loan limit for the county. Otherwise, you will need to seek a lower priced home for the type of qualified home loan.
Overcoming loan limits with jumbo loans
With home values increasing, you may find yourself in need of a larger loan amount than the loan limit for your county. A jumbo mortgage is required if the loan amount (after your down payment) is even $1 over your area’s Federal Housing Finance Agency (FHFA) conforming loan limit.
It is important to note that the recent impact of COVID-19 may require a higher credit score and other requirements to qualify for a jumbo loan. Consult your loan officer before assuming that a jumbo loan will be possible.