FHA Versus Conforming Loan Limits On Home Purchase

Gustan Cho Associates are mortgage brokers licensed in 48 states

This BLOG On FHA Versus Conforming Loan Limits On Home Purchase Was UPDATED And PUBLISHED On May 21st, 2020

FHA Versus Conforming Loan Limits On Home Purchase: New FHA And Conforming Loan Limits came effective for 2018.

Prior to 2018, the maximum FHA loan limits were capped at $275,665 for single family homes
But the $275,665 maximum FHA loan limit was increase to $294,515 in most counties in the United States
FHA then increased loan limits to $314,827 and then in 2020 increased it to $336,760 due to rising home prices
FHA Loan Limits are higher in high cost area due to higher housing prices
High cost areas like many counties in the state of California

High Cost FHA Loans increased loan limits depending on the county.

HUD Increased FHA Loan Limits For Four Years In A Row Due To Rising Home Prices

HUD, the parent of FHA, increased FHA loan limit for the past four years due to rising housing prices nationally:

Put restrictions on home buyers who qualified for higher priced homes and the only way they would qualify
Buyers of higher priced homes with larger caps on loan amounts need to go with conventional mortgage financing
FHA loans are not just for borrowers with bad credit
FHA loans are for those with higher debt to income ratios and borrowers who cannot document income and non-occupant co-borrowers
FHA only requires home buyers to only put a 3.5% down payment on home purchase

Due to FHA loan limits, the maximum loan amount a home buyer can borrow is $336,760 on home purchases unless the subject property is located in a high cost area.

What Happens If Home Buyer Needs To Borrow More Than $336,760

Home buyers needing mortgage greater than $294,515 are now forced to pursue conventional loans or non-qm loans:

FHFA, the Federal Housing Finance Agency increased conforming loan limits effective January 2020
The maximum conforming loan limit is capped at $510,400

However, conventional loan programs are much tougher to qualify for than FHA Loans.

Pros & Cons With FHA Loans Versus Conventional Loans

Many more mortgage applicants qualify for FHA Versus 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 loan programs with Fannie Mae do allow for non-occupant co-borrowers.

Freddie Mae and Fannie Mae will allow non-occupant co-borrowers who are not related to the main borrower by law, marriage, or blood
Freddie Mac and Fannie Mae allow for multiple non-occupant co-borrowers
VA only allows co-borrowers who are married to veteran borrowers
FHA requires for non-occupant co-borrowers to be related to main borrowers by law, blood, marriage
FHA allows multiple non-occupant co-borrowers

FHA Versus Conforming Loan Limits And Sellers Concessions

FHA loan programs allow up to 6% in sellers concessions towards a buyers closing costs
VA allows up to 4% sellers concessions
Conventional loan programs caps sellers concessions towards a buyers closing costs at 3% on primary and second home conventional financing
Conforming Loans cap sellers concessions to 2% on investment properties
FHA loan programs allows up to 100% gift funds from a family member for down payment
Conventional loan programs gift funds towards the home buyers down payment depends on the lender

Borrowers needs to come up with most of the down payment from their own funds with conforming loans.

Down Payment Mortgage Guidelines

FHA loans only require 3.5% down payment on multi unit properties:

Conventional Loans require at least 15% of down payment on multi unit properties
Minimum credit scores for 3.5% down payment FHA loans is 580
To qualify for a conventional loans, the bare minimum credit score is 620
Minimum down payment requirement is 5% down payment on single family homes
However, for conventional loans, credit score is extremely important
620 credit score is considered a very low credit score for a conventional loan
Those with a 620 credit score will be paying a higher mortgage rates

To get the best conventional mortgage rate, borrowers will need a 740 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.

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 FHA Loan
Also, FHA charges a 0.85% annual FHA mortgage insurance premium throughout the life of 30 year fixed rate FHA Loans

The annual FHA mortgage insurance premium is reduced to 0.45% of the FHA loan balance amount for those who can put a 10% down payment and choose a 15 year fixed rate FHA 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 can be much less than FHA’s mortgage insurance premium for borrowers with higher credit scores
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 30 year FHA loan
The only way of eliminating paying the FHA mortgage insurance premium is by paying off the FHA loan off by selling the home or refinancing it to conventional loan
Many homeowners who see an appreciation of their homes can refinance their FHA to a conventional loan

They can eliminate their annual FHA loan mortgage insurance premium.

Lender Paid Mortgage Insurance

There is another program called Lender Paid Mortgage Insurance. LPMI is where there is no private mortgage insurance required for those conventional borrowers with less than 20% equity in their homes.

The Lender Paid Mortgage Insurance program is called LPMI
LPMI is offered by many lenders
In lieu of a higher rate, borrowers does not have to pay private mortgage insurance on their conventional mortgage
The is also a one time upfront private mortgage insurance program on conventional loans

By paying a one time upfront private mortgage insurance premium, they can avoid paying monthly PMI.

Cases Where FHA Versus Conforming Loan Limits Is Only Option

There are situations where a home buyer can only go with conventional versus FHA loan programs is not an option.

If buyers are a condominium home buyer and the condominium complex is not FHA approved, they cannot get a FHA Loans
Conventional loans is only option if condo buyer is dead set in purchasing the non FHA approved condominium
Other cases where a FHA loan is not an option is when buyers want to purchase a home that exceeds FHA loan limits
As mentioned earlier, unless the property is in a high cost area, FHA loan limits mortgage guidelines is set at $294,515
For Conventional programs, conventional mortgage limits has not changed and is currently at $453,100

Home Buyers who need to qualify for mortgage with a direct lender with no overlays on government and/or conventional loans can contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.

This BLOG On FHA Versus Conforming Loan Limits Was UPDATED On May 21st, 2020