FHA loan limits determine home much money can be borrowed to buy or refinance a home with an FHA mortgage program. If you want to borrow to purchase a home, knowing the loan limits will ensure that you won’t waste time looking at houses that fall outside the “official” price range.
FHA programs are primarily designed to encourage home ownership among moderate to low income Americans. So in the spirit of that mission, program caps — or lending limits — are set on the value of the loans they’ll insure. However, you can take comfort knowing that most people will find a home that qualifies for FHA backing because a huge number of properties in the United States fit within FHA’s loan limits. Thinking of buying a mansion in Beverly Hills? Probably not gonna be a FHA loan that gets you in there.
If you’ve skipped ahead to this chapter, here’s a quick, important recap: A FHA loan is a mortgage insured by the Federal Housing Administration (FHA). This insurance covers losses (to the lender) should a borrower default on a loan. Borrowers pay for this mortgage insurance as a part of their monthly mortgage payment. While FHA insurance is government-run, it is paid for by borrowers, not taxpayers.
All types of insurance (i.e. home, auto, life) have limits. FHA programs are no exception. In this case, a FHA loan limit is maximum loan amount for mortgages that will receive FHA backing (insurance). There’s an important distinction here. Did you catch it? The limit is placed on the loan amount, not the purchase price of the home. We just wanted to make sure you picked up on that.
How are FHA Loan Limits Determined?
FHA loan limits are set annually by its “parent” the Department of Housing and Urban Development (HUD). Since no loan amounts that exceed the limit will be insured, it’s a very important benchmark to know.
The FHA uses three key ingredients to determine the maximum loan values they will insure. They are:
- Median home prices
- Type of dwelling
The first ingredient is price. While HUD and its subsidiary, FHA, don’t care how much income you have, they do care about the size of the loans they insure. HUD/FHA looks at the current state of underlying median home values or the House Price Index (HPI), a broad measure of single-family house prices. As mentioned, It’s adjusted annually to account for market conditions which nearly always move up or down. For what it’s worth, sometimes the HPI can even stay the same.
The next ingredient is location – home price data for each state and county in the United States (and US territories) is factored. The core unit of location is a county, but in some case counties will get sliced up a little further into metropolitan areas. You know, because a home in Enumclaw will typically cost less than Capitol Hill in Seattle – yet both are in King County, Washington. Regional adjustments are made to account for high-cost areas where median home prices are — you guessed it — higher. This leeway helps low and moderate income borrowers afford an ‘average’ home in cities. The FHA sets maximum loan limits in higher-cost areas (know as a ceiling) and minimum loan limits in lower-cost areas (known as a floor).
The last ingredient is the type of property; single-family residences have different limits than FHA approved condos and so on. There are four types of dwellings that fit within FHA guidelines. They are:
- One unit (single family home)
- Two units
- Three units
- Four units
So HUD/FHA mashes up home prices, locations and types of dwellings and when blended all together you get a tidy little chart that shows the maximum loan amounts they’ll insure.
FHA Loan Limits
|Property Size||Low-Cost Area “Floor”||High-Cost Area “Ceiling”|
Now that you know how the “Floors” and “Ceilings” work, you can look up the FHA mortgage limits for your county (or metro) in the United States using HUD’s online tool. Special rates apply to Alaska, Hawaii, Guam, and the U.S. Virgin Islands. Rates in those areas tend to be higher.
Loan limits are a key feature of all government-insured mortgages (i.e. VA and USDA loans). Borrowers will need to weigh all the FHA pros and cons when considering whether this program is best for them.