Each year, the Federal Housing Finance Agency sets the maximum conforming loan limits for mortgages backed by Fannie Mae and Freddie Mac. Under these limits, conforming loans are currently capped at $417,000 for single-family homes throughout most of the U.S. In certain high-cost housing markets – including Alaska and Hawaii – the limits can go as high as $721,050, though most high-cost areas top out at $625,500. If you are purchasing a home using a conforming loan, you'll have access to an array of lenders both online and offline.
However, loans that exceed these conforming loan limits are classified as non-conforming or jumbo mortgages, and your lending options for loans of this size are different. The good news is you have a couple of choices, including a conventional mortgage (one that isn’t backed by the government) and a mortgage backed by the Federal Housing Administration (FHA).
First, Check Loan Limits
FHA lending limits vary based on housing type and the state and county where your house is located. In most areas of the U.S., the loan limit is $271,050 for single-family homes, but it can be as higher depending on where you live. If you live in one of these high-cost areas, you may qualify for an FHA-backed jumbo mortgage. Below are three key advantages of these loans.
Smaller Down Payments
The down payment on an FHA loan can be substantially lower than you’d be required to pay for most other types of jumbo loans. FHA down payments can be as low as 3.0% of the home’s purchase price, compared with 20% seen with other loan products. On a $500,000 house, that’s the difference between a $15,000 down payment with an FHA loan and $100,000 with most other loans.
There is a downside to the low down payment: You will be required to pay for mortgage insurance if you put down less than 20% of the purchase price. If your FHA loan originates this year, you'll make mortgage insurance premium (MIP) payments for 11 years if your original loan-to-value ratio (LTV) is 90% or less; if your LTV is greater than 90%, you'll pay MIP for the entire loan term (which can be very costly). The rate you pay depends on the length of the loan and the LTV and– if the loan balance exceeds $625,500 – you’ll owe a higher percentage.
Higher Debt-to-Income Ratio
Your debt-to-income ratio (DTI) compares the amount of debt you have to your overall income. Mortgage lenders use DTI to measure your ability to manage the payments you make each month and repay the money you have borrowed. A low DTI demonstrates you have a good balance between debt and income; conversely, a high DTI shows that you have too much debt for your income. For more insights, see What's considered to be a good debt-to-income (DTI) ratio?
In general, conventional mortgage lenders like to see a DTI of 36% or lower. The FHA has more flexible qualifying standards: 43% is usually the cut-off, but the FHA accepts ratios as high as 56.99% in certain situations.
Lower Credit Scores
In general, credit requirements for FHA loans tend to be more relaxed than those for conventional loans. Although other factors are taken into consideration, you’ll need a minimum credit score of 580 to receive maximum financing (it’s closer to 650 for conventional mortgages; see What Is a Good Credit Score?). If your credit score falls between 500 and 579, you'll likely still be approved — but you will have to make a down payment of at least 10%. If you have a non-traditional credit history or insufficient credit, you may still qualify for an FHA loan if you meet certain requirements.
The Bottom Line
The Federal Housing Administration was created in 1934 to help boost homeownership by making mortgages available to more people. The FHA program lowered down payment requirements, qualified borrowers based on their ability to repay (rather than on whom they knew), established the loan amortization schedule and introduced longer loan terms. The FHA continues to make it easier for people to qualify for mortgages – including jumbo-sized mortgages – through lower down payments and more flexible qualifying standards. See Understanding FHA Home Loans and Top Reasons to Apply for an FHA Loan for additional details on these mortgages.