Each year, the Federal Housing Finance Agency sets the maximum conforming loan limits for mortgages backed by Fannie Mae and Freddie Mac. Under these limits, conforming loans are currently at 417.000 $ for single-family homes limited in most of the U.S. In certain high-cost housing markets – including Alaska and Hawaii – the limits can be as high as $721.050, -cost areas up out at $625, 500. When you buy a home with a conforming load, you have access to a number of lenders both online and offline.
However, loans that exceed these conforming loan limits are classified as non-conforming or jumbo mortgages, and your loan options for loans of this size are different. The good news is that you have some choices, including a conventional mortgage (one that is not backed by the government) and a mortgage backed by the Federal Housing Administration (FHA).
First, check loan limits
FHA lending restrictions vary by home type and the state and country where your home is located. In most areas of the U.S., the loan limit is $271, 050 for single-family homes, but it can be higher depending on where you live. If you live in one of these high-cost areas, you may qualify for an FHA-backed jumbo mortgage. The following are three main advantages of these loans.
Smaller down payments
The down payment on an FHA loan can be much lower than you would have to pay for most other types of jumbo loans. FHA down payments can be as low as 3 0% of the purchase price of the home, compared to 20% seen with other loan products. On a $500, 000 home, that's the difference between a $15, 000 down payment with an FHA loan and $100, 000 with most other loans.
There's a downside to the low down payment: you have to pay for mortgage insurance if you pay less than 20% of the purchase price. If your FHA loan starts this year, you will pay mortgage interest premiums (MIP) for 11 years if your original loan-to-value (LTV) ratio is 90% or less; if your LTV is greater than 90%, you will pay MIP for the entire loan term (which can be very costly). The rate you pay depends on the length of the loan and the LTV and – if the loan balance exceeds $625, 500 – you owe a higher percentage rate.
Higher debt-to-income ratios
Your debt-to-income ratio (DTI) compares the amount of debt you have to your total income. Mortgage lenders use DTI to measure your ability to manage the payments you make each month and pay back the money you borrowed. A low DTI indicates that you have a good balance between debt and income; Conversely, a high DTI indicates that you have too much debt for your income.For more information, see What is considered a good debt-to-income (DTI) ratio?
Generally, conventional mortgage lenders see a DTI of 36% or below. FHA has more flexible qualification standards: 43% is usually the cut-off, but FHA accepts ratios up to 56 in certain situations. 99%.
Lower credit scores
In general, credit requirements for FHA loans tend to be more relaxed than for conventional loans. Although other factors are considered, you need a minimum credit score of 580 to get maximum financing (for conventional mortgages it is closer to 650, see What is a good credit score? ). If your credit score falls between 500 and 579, you'll likely still be approved – but you'll need to make a down payment of at least 10%. If you have a non-traditional credit history or insufficient credit, you may still qualify for an FHA loan if you meet certain requirements.
The Bottom Line
The Federal Housing Administration was established in 1934 to promote homeownership by making mortgages available to more people. The FHA program lowered payment requirements, qualified borrowers based on their ability to repay (rather than on whom they knew), established the loan amortization schedule, and introduced longer loan terms. The FHA continues to make it easier for citizens to qualify for mortgages – including large-volume mortgages – through lower down payments and more flexible qualification standards. See Understanding FHA Home Loans and The Top Reasons to Apply for an FHA Loan for more details on these mortgages.