How Different Loan Limits for Mortgage Products are Determined
There are dozens of choices for loans, and while many people will qualify for more than enough financing, each home loan product has limits. In most cases, these limits are put in place by government authorities. Even jumbo loans, which are by definition larger than all other options, will have limits put in place by the lending institution.
These limits are implemented through a variety of measures, and are often specific to a county, not necessarily the entire country. For example, the limits on an FHA loan for San Diego County (California) are different than the limits for a county in rural Iowa.
Understanding loan limits won’t make you a mortgage expert, but it will help you make a better choice for your next mortgage loan.
How Loan Limits for Each Mortgage Product are Determined
FHA Loan Limits
An FHA loan is simply a loan insured by the FHA against default, which reduces risk to lenders. To obtain this insurance, lenders need to verify that the borrower meet certain standards. They also have to stay within certain limits.
The limits for an FHA loan are set by the county and location of the property. By law, the FHA is required to set the maximum at 115% of the median housing price, which is subject to a maximum amount and a minimum amount.
In low cost areas, the limit is lower. This is often called the “floor.” In 2020, the floor for FHA loans was $331,760. Basically, in low cost areas the FHA will only insure up to $331,760. But in high-cost areas, this will increase. In high-cost counties, the loan limit can go as high as $765,600. HousingWire, a real-estate information source, provides a useful list of counties in the high-cost category.
There are also areas where the max limits are calculated differently. Unique regions like Alaska, Hawaii, Guam, and the Virgin Islands have higher loan limits. In 2020, for example, the limit in these areas is over $1 million!
VA Loan Limits
For qualifying veterans, a VA loan can be one of the most attractive mortgage options, as it’s one of the few loan products that can be used with 0% down. These loans, which are once again insured by the government, are created to be a benefit for serving our country, but they still have limits.
However, the VA no longer has limits for buyers using VA entitlement for the first time. Thanks to legislation passed in 2019, if a veteran is using VA entitlements, which is money backed by the VA, they do not have a limit placed by the Department of Veterans Affairs.
Basically this means that if you qualify, the loan totals could be limitless. However, lenders will still place their own limits on loans, even if the government does not. Therefore, borrowers using VA loans will need to qualify under certain conditions, and there will likely be a reasonable limit set for how much you can borrow.
USDA Loan Limits
In addition to VA loans, this is one of the few government-supported loan options that can be used with no down payment. They are available only for loans used to purchase housing in rural and suburban areas, and are popular for purchasing homes in a variety of regions.
The USDA does not actually set a limit on these loans. Instead, the limits are set by the lender, so the maximum amount for this form of financing will vary widely. Usually, the limit on these loans for most borrowers will be around $300,000 to $400,000.
To use a USDA loan, you will need to meet the requirements for income and debt-to-income ratio. Because of the income limits (if you have a massive annual income, you won’t qualify), these loans are basically given a cap indirectly. (You need a large income to qualify for a large loan, but if you earn a large income you won’t qualify for USDA loans.)
Conventional Loan Limits
The limit for conventional loans, which are supported by Fannie Mae and Freddie Mac, is at least $510,400 across the country. (As of 2020.) This is the “baseline limit” that is used on most areas, although borrowers will still need to qualify for this amount. (Not everyone will qualify for a mortgage of half a million dollars.)
Conventional loans have limits set by the FHFA. The amount is determined on a county-by-county basis, although most counties are assigned the baseline limit. However, high-cost areas like San Diego are given more loan limits, as buyers need more cash to purchase homes in these areas. This is just like the FHA loan program, although the limits tend to be higher, as FHA loan are generally intended for low- to moderate-income buyers.
Jumbo Loan Limits
If you need mortgage financing above the amount allowed by conventional loans, you will likely use a jumbo loan. These loans, which are not supported by any government organization, often have strict qualification requirements, including credit, income, and downpayment requirements. But if you qualify, you can expect funding well over $1 million. In fact, with a sizable downpayment you can use jumbo loans to purchase housing as high at $3 million or more.
The limits for jumbo loans are set by the lender, sometime on a case-by-case basis. For many groups, there is a tiered system that is connected to the downpayment; the more downpayment you can bring, the more money you can borrow. For example, if you can only bring 5%, you will likely qualify for funding less than or right around $1 million. But if you can bring 15%, you can likely utilize financing up to $1.5 million.
Note: Jumbo loans have been significantly impacted by the coronavirus crisis. Numbers cites above are for example only. For current jumbo loan limits, talk with our staff.
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