September 20, 2017
How do FHA mortgage loan-to-value limits work? The loan-to-value (LTV) limit is an indicator of how much of a down payment you’ll be required to make on the FHA mortgage loan. There’s no such thing as a no-money-down FHA mortgage for new purchases, so the LTV is an important detail in your loan transaction.
The rules covering FHA LTV ratios are found in HUD 4000.1, the FHA loan handbook. There we learn the following by way of introduction to the FHA requirements in this area:
“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 in this section.”
Your LTV limits are determined, in part, by your credit score for new purchase loans. That isn’t necessarily true for other types of FHA mortgages. According to HUD 4000.1:
“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.”
Your credit scores will be reviewed to help determine your maximum loan amount and the amount of your down payment.
Borrowers with credit scores of 580 or higher are eligible for maximum financing according to FHA loan rules, which means a down payment of 3.5% of the adjusted value of the property.
Borrowers with FICO scores between 500 and 579 are required to pay 10% down.
It is very important to stress that these are the FHA minimum requirements and lender standards may (and often are) higher. You will need to discuss your credit scores with a loan officer to see what may be required at that particular financial institution.
There are other FHA loan rules for LTVs that require higher down payments. One circumstance that requires a larger amount is when the loan is determined to be an “identity of interest transaction”.
This is defined by the FHA loan handbook as “a sale between parties with an existing Business Relationship or between Family Members. Business Relationship refers to an association between individuals or companies entered into for commercial purposes.”
In such cases the LTV is restricted to 85%, with certain exceptions provided including cases where the borrower purchases the principal residence of another family member, tenant purchase of a rental property, an employer transfer, and other scenarios you can discuss with a loan officer.
There may also be a higher down payment required in cases where there is a non-occupying borrower involved.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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