September 9, 2014
FHA loans are different than conventional loans for a variety of reasons, including the amount of the down payment required. The comparatively lower down payment for FHA loans is one of the biggest advantages–borrowers who have to budget for a smaller down payment have more money to use in other areas of the FHA loan such as the fees for appraisals and compliance inspections.
One important question on the minds of many borrowers involves how much the FHA will guaranty on the loan, what the down payment on that amount might be, and how these numbers are calculated.
The maximum amount of the FHA loan is different than the maximum amount the FHA will guaranty on the loan. The borrower and lender could theoretically agree on a loan amount higher than the amount the FHA will guaranty, but the down payment requirement would increase accordingly. The amount of the loan itself is limited to the sales price or the appraised value (whichever is lower) and any allowable fees or expenses to be added into the loan amount.
Borrowers cannot apply for a loan in excess of that combination mentioned above for the purposes of getting cash out on the deal. This is not permitted.
When it comes to the amount of the loan, borrowers should know FHA loans are never for 100% of the loan amount. The loan-to-value ratio of an FHA loan is determined based on the required down payment. The FHA loan rulesbook, HUD 4155.1, says:
“The determination of the maximum LTV percentage available to the borrower
is influenced by
• the particular mortgage insurance program
• the property type (for example, new or existing construction), and
• various transactions that affect the maximum mortgage calculation, as described in HUD 4155.1 2.B.
Once determined, the LTV percentage is then applied to the lesser of the sales price or the appraised value, on a purchase, to determine the maximum insurable mortgage.”
For single family FHA home loans the minimum required down payment is 3.5% of the total loan amount (sales price or appraised value, whichever is lower, plus any allowable fees/expenses rolled into the loan amount).
Do you have questions about FHA home loans? Ask us in the comments section.
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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