The Federal Housing Administration — known simply to homebuyers as the FHA — has faced tremendous oversight since it was created as part of the National Housing Act of 1934. It has been part of the U.S. Department of Housing and Urban Development (HUD) since 1965, and currently insures loans for millions of American homeowners.
In 2008, lawmakers drafted significant legislation specifically addressing FHA loans: the Economic Stimulus Act and the Housing and Economic Reform Act. The changes made to FHA loan limits were designed to allow the FHA to serve an expanding pool of possible homeowners. The crafting of the legislation was important, as prior underwriting standards of FHA loans excluded a large number of potential borrowers across the country lacking other means or access to private funding.
Every year, our elected officials in Congress work together with HUD and the FHA to establish new loan limits (or both a floor and a ceiling) for FHA loans. This typically translates to more buying power for first-time buyers. More importantly, it plays an important role in enabling minority borrowers such as Black and Latino families to become homeowners.
What Makes FHA Loans Different
If you’ve done your research, you already know the FHA offers low-to-moderate income borrowers and those with smaller down payments the chance to become homeowners. What you probably don’t understand is why or how.
How can the Federal Housing Administration, which doesn’t actually extend financing, hold a reputation as one of the most popular financing options available? It has to do with the fact that the FHA backs the loans made available from private lenders, who are encouraged to extend mortgages to buyers who otherwise might not qualify.
As one might expect, there are strings attached to FHA-backed loans with more liberal rules than conventional financing. In particular, there are limits on the mortgage amounts that vary by county (yes, all 3,141 counties in the U.S.). In 2020, that range is from $331,760 (the floor) to $765,600 (the ceiling). The rules vary and are modified for high-cost areas but are based on conforming loan limits set by the Federal Housing Finance Agency for Fannie Mae and Freddie Mac.
How FHA Loan Limits Are Set
Remember the oversight we talked about earlier? The FHA is required by the National Housing Act to set what are known as single-family forward loan limits. An amendment in the Housing and Economic Recovery Act of 2008, more specifically, set such limits at 115% of median home prices, subject to those aforementioned floor and ceiling numbers. The FHA calculates those limits by Metropolitan Statistical Area (MSA) and county.
The important thing to remember is this: No matter what type of FHA-backed loan you’re applying for, there will be limits on the mortgage amount depending on the location of the property.
Take, for example, that the upper limit for an FHA loan on a single-family home in low-cost Potter County in Pennsylvania is $331,760. By comparison, the upper limit on FHA loans in the highest-cost counties — places like Queens, New York or San Francisco County, California — is $765,600.
Some counties have prices where the limits actually fall somewhere in between. One example of this is Salt Lake, Utah, where the 2020 FHA loan limit for a single-family home is $416,300.
On the HUD website, you can find the FHA loan limit for any area in the U.S., listed by state, county, or Metropolitan Statistical Area. The site also includes a median sales price value for each area.
Exceeding the FHA Loan Limit
You might be looking for approval on an FHA loan in an area where the median sales price exceeds the FHA loan limit floor. That sounds problematic, right?
Actually, there are 70 counties where this becomes an issue. These are known as “high-cost areas”, and the FHA’s maximum loan limit is equal to 150% of the usual national conforming limit. That means these counties have a limit of $765,600, which is an increase of nearly $40,000 over 2019.
You would also suspect, based on rudimentary knowledge alone, there must be areas of the country where loan limits are handled differently than the rest. And you would be right.
2020 FHA Forward Loan Limit Top 25 Areas At Ceiling
|CA||San Francisco-Oakland-Berkeley||Contra Costa||$765,600||$980,325||$1,184,925||$1,472,550|
|CA||Los Angeles-Long Beach-anaheim||Los Angeles||$765,600||$980,325||$1,184,925||$1,472,550|
|CA||Los Angeles-Long Beach-Anaheim||Orange||$765,600||$980,325||$1,184,925||$1,472,550|
|CA||San Jose-Sunnyvale-Santa Clara||San Benito||$765,600||$980,325||$1,184,925||$1,472,550|
|CA||San Francisco-Oakland-Berkeley||San Francisco||$765,600||$980,325||$1,184,925||$1,472,550|
|CA||San Francisco-Oakland-Berkeley||San Mateo||$765,600||$980,325||$1,184,925||$1,472,550|
|CA||San Jose-Sunnyvale-Santa Clara||Santa Clara||$765,600||$980,325||$1,184,925||$1,472,550|
|CA||Santa Cruz-Watsonville||Santa Cruz||$765,600||$980,325||$1,184,925||$1,472,550|
|DC||Washington-Arlington-Alexandria||District of Columbia||$765,600||$980,325||$1,184,925||$1,472,550|
|NJ||New York-Newark-Jersey City||Bergen||$765,600||$980,325||$1,184,925||$1,472,550|
|NJ||New York-Newark-Jersey City||Essex||$765,600||$980,325||$1,184,925||$1,472,550|
Housing markets in places like Alaska and Hawaii, along with the territories of the U.S. Virgin Islands and Guam, have much higher FHA ceilings. This is due to construction costs factored in for these areas, and thus the 2020 FHA loan limit stands at $1,148,400.
All potential homebuyers need to understand that limits on FHA loan amounts will vary from area to area and are updated or reviewed every year. It’s also important to realize that FHA-backed loans are meant to help people meet the goal of homeownership, not purchase lavish and luxurious properties.
Finally, you need to know that single-family properties have one set of FHA mortgage limits. There also limits applying to multi-unit properties such as apartments and duplexes.
Do FHA Limits Make Loans Less Attractive?
Are FHA loan limits really a drawback? Consider that in 2020, the FHA’s floor limit is the number mentioned above — $331,760. That’s an increase of nearly $17,000 over 2019’s limit of $314,827. The 2019 limit was an increase over the 2018 limit, and so on.
According to the FHA, loan limits went up in almost all of the 3,233 counties it services. Only 11 areas nationwide saw the limit actually go down, and it was due to changes in home prices in those counties.
The one thing that might make FHA loans less attractive is comparing them to conventional loan limits in the same low-cost areas. Data showing a side-by-side comparison looks like this:
- FHA Loan Limit (One-Unit) $331,760 vs Conventional Loan Limit (One-Unit) $510,400
- FHA Loan Limit (Two-Unit) $424,800 vs Conventional Loan Limit (Two-Unit) $653,550
- FHA Loan Limit (Three-Unit) $513,450 vs Conventional Loan Limit (Three-Unit) $789,950
- FHA Loan Limit (Four-Unit) $638,100 vs Conventional Loan Limit (Four-Unit) $981,700
Remember, the above-listed amounts only reflect the amount of the loan the FHA will guarantee, not how much you can spend on the property. The limits don’t reflect any down payment made or the loan-to-value ratio of an FHA-backed loan (which is typically 96.5% with a 3.5% down payment). If you can afford a larger down payment, it will obviously hold buying power that goes above these limits.
On the flip side, just because the FHA is willing to insure a specific home loan doesn’t mean you can or will qualify to borrow that amount. Every buyer will have a specific set of circumstances as it pertains to a mortgage application. But in most real estate markets, the limits listed here should give any buyer plenty of properties to look at and put them on a wish list. If you need it to accommodate the top of the price spectrum, you may need a different kind of loan.
Other FHA Rules for Borrowers
If you think you’re going to utilize an FHA mortgage for your home, it’s important to know what FHA loan limits are — but it’s not the only thing you should be focused on. FHA loans have other set rules and requirements to qualify as a borrower. What’s more, these are the FHA’s minimum requirements. That means private lenders may have additional restrictions in place for borrowers.
The one thing that might take potential homeowners by surprise is the need to pay FHA mortgage insurance. It’s similar to private mortgage insurance in that lenders require it on mortgages where borrowers don’t put at least 20 percent down.
The caveat with FHA mortgage insurance is this: it’s paid in two ways. The first payment comes as part of closing costs on the property, and then you make additional insurance payments as part of your overall monthly mortgage payment. The amount rolled into your closing costs is typically equal to 1.75% of the total loan amount, but it varies based on a number of factors including the size of the down payment, length of the loan, and the loan-to-value ratio.
There’s no getting around mortgage insurance premiums with the FHA, it’s just how the system works. Those insurance payments are moved into a fund maintained to pay lenders for mortgages where owners default on the loans.
Private mortgage insurance is typically canceled after your home gains at least 20% equity, or can be canceled automatically once equity in the property reaches at least 78% of the purchase price. Unfortunately, FHA mortgage insurance cannot be canceled if your down payment is less than 10%. That means you’re stuck with it unless you refinance the mortgage into a non-FHA loan.
When you put down 10% or more, the rule is that you’ll pay the mortgage insurance premiums for 11 years rather than the life of the loan.
The Bottom Line
Standards for FHA loans (including loan limits) are arguably more generous every year. They support the first-time homebuyer, the low-to-moderate income buyer, or the person with debt or less-than-perfect credit who wants to buy a home. He or she can do so, many most assuredly, backed by an FHA loan.
Of course, it’s important to weigh the pros and cons and consider both the benefits and the drawbacks to an application for an FHA loan. For some borrowers, the choice to go with an FHA loan seems like a no-brainer. For others, they find the combination of lending limits and other regulations undesirably restrictive.
Once you’ve reached the point where you’ve been pre-approved for a mortgage (and thus, know how much you qualify to borrow and what you can honestly afford), the decision to take out an FHA loan becomes less complicated.
Overall, more constrained borrowers may end up making higher down payments or looking for a list of affordable homes that will fit within the FHA’s guidelines. Whether you’re confident an FHA loan is the right solution for you or whether you’re still weighing your options, we hope we’ve broken down the details in a way that’s helpful. Happy house hunting!
- U.S. Department of Housing and Urban Development, FHA Mortgage Limits. Accessed at https://entp.hud.gov/idapp/html/hicostlook.cfm
- U.S. Congress, H.R.3221 – Housing and Economic Recovery Act of 2008. Accessed at https://www.congress.gov/bill/110th-congress/house-bill/3221
- Lending Tree, FHA Loan Limits in 2020: How Much Can I Qualify For? Accessed at https://www.lendingtree.com/home/fha/much-fha-loan-can-qualify-afford/
- Housing Wire, FHA loan limits increasing for almost all of U.S. in 2020. Accessed at https://www.housingwire.com/articles/fha-loan-limits-increasing-for-almost-all-of-us-in-2020/
- Nerd Wallet, FHA Loan: What You Need to Know. Accessed at https://www.nerdwallet.com/article/mortgages/fha-loan
- MillionAcres, 2020 FHA Loan Limits: How Much Can You Borrow? Accessed at https://www.fool.com/millionacres/real-estate-financing/fha-loans/2020-fha-loan-limits-how-much-can-you-borrow/