Have you ever wondered how FHA maximum mortgage amounts are calculated? FHA loan rules in HUD 4000.1 explain how it works, starting with a borrower’s required minimum down payment and including what happens when certain add-ons to the loan are included. How much can you really borrow with an FHA mortgage?
According to HUD 4000.1, the FHA loan handbook, “Mortgage limits are calculated based on the median house prices in accordance with the statute. FHA’s Single Family mortgage limits are set by Metropolitan Statistical Area and county and will be published periodically.” Those limits are published just before the start of the new year and take effect the first day of the new year.
But the amount of your FHA home loan may include more than just the calculation mentioned above. HUD 4000.1 states, “Under most programs, the maximum Mortgage is the lesser of the Nationwide Mortgage Limit for the area, or a percentage of the Adjusted Value. For purchase transactions, the Adjusted Value is the lesser of:
-purchase price less any inducements to purchase; or
-the Property Value.”
And above that, certain add-ons to the mortgage are permitted. One such add-on is added funds for making approved energy-efficient upgrades to the property to be purchased with the FHA mortgage. This is known as the FHA Energy Efficient Mortgage loan, and borrowers interested in this feature should discuss it with their loan officer to learn how the requirements work.
Another add-on to the loan? Financing of the FHA Up Front Mortgage Insurance Premium (UFMIP). Borrowers may finance the entire UFMIP into the loan amount, or they must pay the entire UFMIP in cash at closing time.
For both the FHA EEM and FHA UFMIP (when financed into the loan), the maximum mortgage amount is calculated before adding the cost of the EEM or UFMIP. Those items, when rolled into the loan amount, are included AFTER the maximum mortgage amount has been calculated based on the adjusted value of the property. In other words, for the purposes of setting the maximum loan amount, UFMIP and FHA Energy Efficient Mortgages are not included, but added “after the fact”.
Borrowers are required to make a minimum down payment of 3.5% of the adjusted value of the property for all forward mortgages. Payment or financing of UFMIP and other expenses cannot be included as part of the down payment, but the down payment calculation is made without the add-ons, so choosing to finance your UFMIP and/or apply for an FHA EEM would not mean a higher down payment according to HUD 4000.1 (Additional lender standards may apply depending on circumstances, speak with your loan officer to learn more.)
The one thing a borrower cannot do is to apply to borrow more money than is required on the FHA mortgage (the total amount including any UFMIP or EEM add-ons) and take the excess cash at closing time. This is not allowed by FHA loan rules, and in most cases any cash back at closing is in the form of a refund for expenses paid up front but later included in the loan.