When you are shopping for a home and you know you are going to use FHA streamline financing, you might be concerned with the FHA loan limits. These limits are put in place based on the average price of the homes in the area. This amount is then compared to the conforming loan limit, which right now is $417,000. If you live in a high-cost area, the FHA loan limit might be slightly higher than the national conforming limit. On the other hand, if you live in a low-cost area, the FHA loan limit will be lower than $417,000. As it stands right now, the FHA limits vary from $271,050 to $625,000 throughout the United States. But these are not the numbers you should concern yourself with right off the bat – there are three other factors you should consider when applying for an FHA loan.
What’s your Credit Score?
The first issue to be concerned with is your credit score as this is a driving factor in whether or not you are eligible for an FHA loan. Luckily, FHA loans have the lowest requirements for credit scores in most cases. According to the FHA, you only need a credit score of 580 to put down just 3.5 percent on the home you wish to purchase and a score of 500 if you can put 10 percent down on the home. The individual lender you decide to use might have a differing opinion, though. They might not be willing to lend to people with a credit score as low as 500 – in fact, their minimum score might even be 600 or higher, depending on the risk level they are willing to take.
Aside from having the minimum credit score to qualify for the program; however, your credit score helps to determine your loan amount. For example, if you are at the lower end of the acceptable credit scores for a particular lender, they may restrict the amount of money they are willing to loan you. For example, even if the maximum loan amount in your area is $500,000, it does not mean you will be eligible to receive that amount – the lender will take into consideration all of the factors surrounding your loan, including your credit score.
How Steady is your Income?
Your income plays a very important role in the FHA loan amount you are able to receive. There are several requirements regarding your income that you must adhere to including:
- The stability and consistency of the income
- The amount of income
You have to be able to prove that you have received the income you receive now for the last 24 months, for most lenders. Some lenders are able to grant exceptions if you were working within the same industry or if you recently took on a better paying job, but consistency is the key. The amount of the income also plays an important role because it determines how much you can afford. Going back to the example of purchasing a home in an area where the FHA loan limit is $500,000, you would need to prove that you had adequate income to afford a loan of that nature or your maximum loan amount would be lower. The lender will determine your exactly circumstances to come up with the right loan amount for you.
What is your Debt Ratio?
If you have never figured out a debt ratio before, this might be a gray area for you. This number is the amount of your monthly debt compared to the income that you bring in on a monthly basis. The lender uses your gross income and all debts that report on your credit report. A few of these debts outside of the new principal, interest, taxes, and insurance include revolving debts (credit cards) and installment loans (car or student loans). The lender needs a total of the monthly debts compared to your income to see what percentage of your income would go to your debts. In general, the FHA does not want a debt ratio higher than 31 percent on the front end, which is your principal, interest, taxes, and insurance and 43 percent on the back end, which is all of your debts including the mortgage. Some lenders will have differing ratios that they require based on the level of risk they can take. In general, however, the higher your debt ratio or the closer it is to the FHA limits, the lower the loan amount you will be approved for by any lender.
As you can see, there are many factors to consider when looking at the FHA loan limits. You cannot just assume that you will get approved for the specific loan limit for your area. Your individual factors play an important role in whether or not you get approved for the full amount or a smaller amount. Because every lender has different requirements, you might find that one lender will give you a higher loan amount than another – if you are turned down for the amount you need from one lender, consider applying with a different lender to see if there is a difference in the loan limit you are provided.