How much can you borrow? There are a few limits that tell you how much you can borrow and the primary one compares your monthly payments with your gross monthly income. In this fashion, how much you can borrow is dependent upon how much money you make each month and lenders employ debt ratios to help make that determination. A debt ratio is number arrived at dividing the monthly mortgage payment as well as all credit payments by gross monthly income. In general lenders like to see the mortgage payment be around one-third of gross monthly income.
Loan limits are also set by the Federal Housing Administration and are based upon the local real estate market. Those that live in so-called higher cost areas will be able to borrow more with an FHA loan compared to other areas. For example, in Los Angeles County the maximum FHA loan amount is $625,500 for a single family home and $800,775 for a duplex as long as the borrower lives in one of the units. FHA loans are issued for a primary residence only.
If you travel across the state border into Arizona the FHA loan limit falls to $271,050 for a single family home and $347,000 for a two-unit. FHA loans can also be used to finance up to a four-unit property, or a fourplex. These loan limits are set county-by-county and can be different even if two counties share the same border. Each year, FHA establishes a maximum loan amount and a floor. The floor for FHA loans is at 65% of the conventional loan limit. In most areas this loan limit is $417,000. 65% of $417,000 is $271,050. FHA establishes the FHA loan limit with both the floor and ceiling in mind at 115% of the median home price for the area. This median home price is set using sales of homes within that county over the previous year.
And finally, an FHA loan limit is based upon the sales price of the home, less the minimum down payment plus the upfront mortgage insurance premium, or UFMIP. This premium is currently 1.75% of the amount financed. So, if a home is purchased for $250,000 with a minimum down payment your loan amount is $241,250 then by rolling in the UFMIP premium of $4,221 the final loan amount is $245,547.
Note that FHA loans certainly allow for a larger down payment it’s just that most every borrower puts down the minimum down payment, especially those who are buying their first home and saving up enough funds for the down payment and associated costs but the minimum down payment is a requirement.