There are so many factors to keep in mind when buying a home. Arguably, the most important financial decision homebuyers need to make comes down to financing. One mortgage option that is known for its flexibility and low barrier to entry is a Federal Housing Administration (FHA) loan.
This type of loan is particularly attractive to first-time homebuyers who have less-than-stellar credit scores and cannot afford a large down payment. With these perks, however, there are some limitations to keep in mind. Let’s explore what FHA loan limits look like in 2023.
FHA loan limits for 2023
FHA loan limits are broken down into two categories: low-cost areas and high-cost areas. The FHA loan limit for a single-family home in a low-cost area is $472,030. The FHA loan limit for a single-family home in a high-cost area is $1,089,300. There is also a special exception for Alaska, Hawaii, Guam, and the Virgin Islands. The loan limit for a single-family home in these areas is $1,633,950. You can also get an FHA loan for a duplex, triplex, or fourplex. The following chart showcases all the loan limits for 2023.
| Low-cost area | High-cost area | Special exceptions | |
|---|---|---|---|
| One-unit | $472,030 | $1,089,300 | $1,633,950 |
| Two-unit | $604,400 | $1,394,755 | $2,092,150 |
| Three-unit | $730,525 | $1,685,850 | $2,528,775 |
| Four-unit | $907,900 | $2,095,200 | $3,142,800 |
Factors that affect FHA loan limits
The median house price for the county and Metropolitan Statistical Area (MSA) in which a home is located determines the FHA loan limits. The limits are calculated based on single-family homes and are set higher for duplexes, triplexes, and fourplexes.
- Low-cost areas: For low-cost areas, mortgage loan limits are set at 65% of the national conforming loan limit, which is $726,200. Sixty-five percent of $726,200 is $472,030.
- High-cost areas: For high-cost areas, mortgage loan limits are set at 150% of the national conforming loan limit of $726,200. One-hundred-fifty percent of $726,200 is $1,089,300.
- Special exceptions: Higher construction costs allow the special exception areas of Alaska, Hawaii, Guam, and the Virgin Islands to have a higher loan limit ceiling, which is reflected in the above table.
FHA loan guidelines
An FHA loan has advantages, such as low down payment options, low closing costs, and more lenient credit qualifications, but you need to meet certain guidelines to qualify for one. Here are the factors to keep in mind:
Minimum down payment
You can get an FHA loan with a minimum down payment of 3.5%. But you’ll need to pay two mortgage insurance premiums. The first is a one-time, upfront payment, usually 1.75% of the loan amount, which you could roll into your mortgage. The second is an annual premium that is divided by 12 and added to your monthly payment. This is usually between 0.45% and 1.05% of your loan. The annual premium remains for the life of the loan. Many borrowers refinance their loan to a conventional loan to drop the mortgage insurance once they reach 20% equity in the home.
Credit score minimum
The minimum credit score to get an FHA mortgage loan is 500, but this could vary by lender. To clarify, the FHA is not a lender, instead, it assumes the risk on the part of the lender and promises to pay them if a borrower defaults on the loan. Since these are two separate entities, the rules can differ. Many lenders that offer FHA loans require a higher minimum score of 620, so you might have to shop around to find the right fit for your needs.
Debt-to-income ratio
The highest debt-to-income ratio (DTI) allowed for an FHA loan is typically 43%. But this could vary by lender. Your DTI is calculated by taking all your monthly debt payments and dividing them by your gross monthly income. The lower your DTI, the more likely you are to be able to make your mortgage payment.
Other guidelines
The FHA has additional guidelines for a home purchase:
- You need to have the home appraised by an FHA-approved appraiser.
- You must have the home inspected and it needs to meet certain standards, such as safety, security, and soundness. In other words, the home must be livable.
- The home must be your primary residence. For duplexes, triplexes, and fourplexes, you would need to live in one of the units.
- You must occupy the house within 60 days after you close.
How to apply
To apply for an FHA loan, you would contact a mortgage lender. The Department of Housing and Urban Development offers a lender list search that helps you find lending institutions. The process to apply for an FHA loan is similar to applying for a conventional loan. You could also use a mortgage broker to help you find the best lender for your needs. Remember, the FHA isn’t a lender; it serves to insure loans that lenders otherwise might be reluctant to offer.
Once you contact a lender, be prepared to provide the following information:
- Your full legal name so the lender can pull your credit report.
- Your address history for the last two years so the lender can match this to your credit report.
- Your total assets. You can show the last two months of your bank statement and your retirement account statement, such as a 401(k). You can also include money you get from other sources, such as child support.
- Your employment information, such as pay stubs and W-2 statements for the last two years. If you’re self-employed, you can include personal and business tax returns to prove income.
FAQ
Do I have to be a first-time homebuyer to get an FHA loan?
To be eligible for an FHA loan, you do have to be a first-time homebuyer, however, the definition is not as clear-cut as it sounds. According to the Federal Housing Administration, a first-time homebuyer is anyone who has not purchased a home in the last three years, is a single parent or displaced homemaker who has only ever owned a property with their ex-spouse while still married, has only owned a home that was not tied to a permanent address, or has only owned a home that was not up to code.
Do I have to show proof of income to qualify for an FHA?
To qualify for an FHA loan, you will have to show proof of income over the last two years and meet certain credit score and DTI guidelines before you can be approved for the loan.
What is the maximum DTI ratio for an FHA loan?
Typically, the maximum debt-to-income ratio for an FHA loan is 43%. But there may be some instances where 45% is acceptable too, depending on qualifying factors.