FHA home loans have limits on the amount of the loan, how much of the loan the FHA will guarantee, and the loan-to-value ratio or LTV.
The LTV of your home loan is basically the percentage of the mortgage compared to the value of the property. There’s an loan-to-value calculation required in part because the borrower is required in most cases to make a minimum down payment for “forward mortgages”.
These down payments are not required by FHA loan rules for FHA rehab loans to fix or replace qualifying homes in federally-declared disaster areas, but for all other new purchase FHA loans, the borrower will be required to make a minimum down payment.
FHA loan rules in HUD 4000.1 spell out the requirements for this down payment and calculating the loan-to-value ratio. It begins by stating:
“The determination of the maximum LTV percentage available is influenced by:
- the particular mortgage insurance program (See Programs and Products); and
- the transaction type.
The Mortgagee must apply the lowest applicable LTV percentage as determined under the requirements…”
Your loan-to-value ratio is also affected by your credit score-a borrower with credit issues may be required to make a higher down payment depending on the credit score, FHA loan rules, lender standards, or other regulations. HUD 4000.1 states:
The Mortgagee must review the credit report to determine the Borrower’s Minimum Decision Credit Score (MDCS), except for Mortgages to be insured under Section 247, Section 248, Streamline Refinances, and Assumptions. The MDCS will be used to determine the maximum insured financing available to a Borrower with traditional credit.”
Basically, under FHA home loan rules, any borrower with a credit score of 580 or higher is eligible for maximum FHA loan financing, which requires a 3.5% down payment based on the adjusted value of the property.
FHA loan rules also state that a borrower’s loan-to-value ratio will be different if credit scores between 500 and 579 are applicable-the borrower would be required to make a 10% down payment in such cases. That would make the LTV on such a transaction 90% rather than the 96.5% possible for FICO scores 580 or higher.
These rules do not include lender standards, which may also apply. Borrowers should check with their loan officer to see what FICO score standards may apply from the lender above and beyond these FHA home loan rules.