High Balance FHA Loans Explained

High Balance FHA Loans Explained

FHA loans are extremely popular with first time home buyers. There are two basic reasons for this. The first being the low down payment required of just 3.5% of the sales price. The second is somewhat relaxed credit guidelines for FHA loans. Easier qualifying and lower down payment make it a magnet for first timers. FHA loans can be used to finance a primary residence but cannot be used to finance a rental property or second home.

FHA loans also carry a guarantee to the lender in the instance of loan default. Should an FHA loan go into foreclosure the lender is compensated for the loss. This added feature helps lenders relax credit guidelines somewhat due to this guarantee. The guarantee is financed by two separate forms of mortgage insurance, an upfront mortgage insurance premium and an annual premium that is paid in monthly installments.

Minimum credit scores for FHA loans start at 580 with a minimum down payment but can go lower if the buyers put down more. Lenders will check there is a record of at least two years of employment history and ask for copies of the most recent pay check stubs covering a 30 day period. There are other qualifying guidelines but these are the main ones. Your loan officer will provide a list of items needed when you submit your application.

Besides only being available for a primary residence there is also a maximum loan limit for FHA loans. These loan limits can vary county by county but in most areas the maximum loan amount is $314,827 for a single family home. Multi-unit properties up to four units will have higher limits. A two-unit home is limited to $403,125, three units at $487,250 and a four unit limit is $605,525.

FHA loan limits are set at 65% of the national conforming loan limit of $484,350. That said, if FHA loan limits are set based upon conforming limits, how are conforming limits set? Each year in October, the Federal Housing Finance Agency, or FHFA, reviews the national median home value and compares it with the previous year. If there is an increase in median value, the conforming loan limit will be raised accordingly for the following year. That’s why FHA loan limits can change each year based upon the performance of median home values across the country. The maximum FHA loan limit for Miami, FL is $356,500 for a single family home while in Sarasota, FL the maximum is set at $320,850.

Yet there are parts of the country where the median home values are much higher. These areas are officially deemed “high cost.” In such areas, standard conforming loan limits would not apply and borrowers would be forced to take out more expensive jumbo loan programs. But “high balance conforming” and “high balance FHA” make adjustments for these higher values. In areas deemed high cost, FHA loan limits are set at 150% of the national conforming limit of $484,350. In a high cost area the FHA loan limit can be as high as $726,525. A two-unit property is set at $930,300, a three unit at $1,124,475 and a four unit at $1,397,400. There are other areas that fall into a Special Exception category with still higher loan limits for properties based in Alaska, Hawaii, Guam and the Virgin Islands.

Again, these limits can vary based upon location but these areas are identified and all the potential buyers need to do is provide their loan officer with a property address including zip code and county to see if a high balance FHA loan is available. Underwriting guidelines for high balance FHA loans are essentially the same as a standard FHA loan as it relates to employment, credit, income and assets. The only big difference is the final loan amount. Should you take out an FHA loan over all the other choices if buying in a high cost area? By all means you should compare all of your options provided to you by your loan officer but if a lower down payment, easier qualifying along with a lender guarantee it’s makes a compelling case when buying and financing in an area where homes are priced much higher compared to the rest of the country.