November 3, 2010
The first question an FHA borrower wants answered is often, “How much can I borrow with an FHA loan?” The answer depends on what kind of transaction the FHA loan applicant wants to make–there are different FHA loan limits depending on the type of borrower, the transaction, and the nature of the property itself.
Sorting through the FHA maximum loan amounts can be tricky. It helps to understand the basic concepts and structure of an FHA home loan. The FHA insures loans for a percentage of the property value. That means a particular home might be on the market for $250,000 but if the property is appraised at $200,000 the FHA would only guarantee a loan for a percentage of the $200,000 rather than the full asking price.
The buyer would need to negotiate with the seller, come up with a down payment for the difference, discuss terms of the sale with the lender, or look for a different property.
Newcomers to the FHA loan process may feel a bit confused at this point, so let’s break the numbers down.
A buyer finds a property they want to purchase with an FHA loan. The property is appraised at a specific value–a dollar amount the FHA will then calculate the maximum loan amount with.
If a particular property is appraised at $100,000 and the buyer qualifies for the maximum FHA mortgage percentage of 96.5%, the FHA will guarantee a loan for $96,500 assuming the FHA applicant is qualified and approved for the loan. If so, the buyer comes up with the remaining 3.5% or $3,500 as a down payment.
FHA loan applicants aren’t guaranteed to get the maximum of 96.5% – there are factors that may affect how much of the property value the FHA is willing to guarantee a loan for–we’ll explore those issues in another blog post.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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