2014 FHA Loan Limits

New FHA loan limits came into play in 2014.  Prior to 2014, the maximum FHA loan limits were capped at $410,000 for single family homes but the $410,000 maximum FHA loan limit was reduced to $271,000 in most counties in the United States unless it was a high cost area where the FHA loan limit is higher than the standard $271,000 depending on the county.  The reduction of the maximum FHA loan limit in 2014 put restrictions on home buyers who qualified for higher priced homes and the only way they would qualify for higher priced homes with larger caps on loan amounts is to go with conventional mortgage financing.  FHA loans are not just for mortgage loan borrowers with bad credit but FHA loans are for those with higher debt to income ratios and those mortgage loan borrowers who cannot document income and need non-occupant co-borrowers.  FHA only requires a mortgage loan borrower to only put a 3.5% down payment for owner occupant homes.  Due to  2014 FHA loan limits, the maximum loan amount a home buyer can borrow is $271,000 for a residential mortgage loan unless the subject property is located in a high cost area.

What Happens If Home Buyer Needs To Borrow More Than $271,000

Home buyers needing mortgage loans greater than $271,000 are now forced to pursue conventional mortgage loan programs.  Conventional mortgage loans are not affected by new 2014 mortgage lending guidelines.  The maximum conventional mortgage loan is still capped at $417,000.  However, conventional mortgage loan programs are much tougher to qualify for than FHA mortgage loan programs and does not have the many advantages FHA loans offers its mortgage loan borrowers.

FHA Loans Versus Conventional Loans

Many more mortgage loan applicants qualify for FHA loans than they do for Conventional loans.  For example, to qualify for a FHA loan after a foreclosure, the waiting period is 3 years from the recorded date of the foreclosure whereas with a conventional loan, a conventional loan borrower cannot qualify for a conventional mortgage loan after 7 years from the recorded date of their foreclosure.  With FHA loan programs, there is a minimum two year waiting period after the discharge date of a bankruptcy.  You need to wait four to seven years from the discharge date of a bankruptcy to qualify for a conventional mortgage loan.  Maximum debt to income ratios for FHA loan programs is 56.9% DTI.  For conventional loans, most conventional loan programs cap the debt to income ratios at 45% DTI.  FHA loan programs allow for non-occupant co-borrowers.

Non-Occupant Co-Borrowers

Conventional mortgage loan programs with Fannie Mae do not allow for non-occupant co-borrowers except Freddie Mac.  Freddie Mae will allow non-occupant co-borrowers. FHA loan programs allow up to 6% in sellers concessions towards a buyers closing costs.  Conventional loan programs caps sellers concessions towards a buyers closing costs at 3%.  FHA loan programs allows up to 100% gift funds from a family member for down payment.  Conventional mortgage loan programs gift funds towards the home buyers down payment depends on the mortgage lender but want the borrower to come up with most of the down payment from their own funds.  FHA loan programs only require 3.5% down payment on multi unit properties.  Conventional loan programs require at least 15% of down payment on multi unit properties.  Minimum credit scores for 3.5% down payment FHA loans is 580 FICO.  To qualify for a conventional loan, the bare minimum credit score is 620 FICO and the minimum down payment requirement is 5% down payment.  However, for conventional loans, your credit score is extremely important and a 620 FICO credit score is considered a very low credit score for a conventional loan and those with a 620 FICO credit score will be paying a higher mortgage rate.  To get the best conventional mortgage rate, you will need a 740 FICO credit score.

Mortgage Insurance Premium For FHA Versus PMI For Conventional Loan

One major disadvantage of FHA loan programs over Conventional mortgage loan programs is mortgage insurance.  If you proceed with a FHA insured mortgage loan, FHA charges an upfront mortgage insurance premium of 1.75% of the mortgage loan amount.  This one time upfront mortgage insurance premium is normally rolled into the balance of the mortgage loan.  Also, FHA charges a 1.35% annual FHA mortgage insurance premium throughout the life of the mortgage loan for 30 year fixed rate loans.  The annual FHA mortgage insurance premium is reduced to 0.45% of the FHA mortgage loan balance amount for those who can put a 10% down payment and choose a 15 year fixed rate FHA insured mortgage loan.

Requirement On Private Mortgage Insurance On Conventional Loans

Conventional mortgage loan programs do not require private mortgage insurance premium for home buyers who can put a 20% down payment on their home purchase or those who refinance mortgage loans with at least 20% equity in their homes.  However, mortgage insurance premium is required for homeowners with less than 20% equity.  However, private mortgage insurance premium is much less than FHA’s mortgage insurance premium and the private mortgage insurance premium can be cancelled once the homeowner has at least 20% equity in their homes.  With FHA loan programs, the mortgage insurance premium is charged throughout the life of the FHA loan and the only way you can eliminate paying the FHA mortgage insurance premium is by paying off the FHA loan.  Many homeowners who see an appreciation of their homes can refinance their FHA loan to a conventional loan where they can eliminate their annual FHA loan mortgage insurance premium.

Lender Paid Mortgage Insurance

There is another program called Lender Paid Mortgage Insurance where there is no private mortgage insurance required for those mortgage loan borrowers with less than 20% equity in their homes.  The Lender Paid Mortgage Insurance program is called LPMI and is offered by many conventional mortgage lenders.  In lieu of a higher mortgage rate, the mortgage loan borrower does not have to pay private mortgage insurance on their conventional mortgage loan.

Cases Where Conventional Loans Are The Only Option

There are situations where a home buyer can only go with conventional loans and FHA loan programs is not an option.  If you are a condominium home buyer and the condominium complex is not FHA approved, you cannot get a FHA insured mortgage loan and a conventional loan is your only option if you are dead set in purchasing the non FHA approved condominium.  Other cases where a FHA loan is not an option is when you want to purchase a home that exceeds FHA lending limits set in 2014 FHA lending limits guidelines.  As mentioned earlier, unless the property is in a high cost area, FHA loan limits in 2014 per FHA loan limits mortgage lending guidelines is set at $271,000.  For Conventional mortgage loan programs, conventional mortgage lending limits has not changed and is currently at $417,000.

Gustan Cho

www.gustancho.com

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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