Since the 1930s, the Federal Housing Administration has been backing home loans by insuring them against default by borrowers. A FHA loan is one that's covered by this mortgage insurance, and allows lenders to lower their risk as well as their interest rates. Although a bank or mortgage company still extends the loan, the FHA steps in to repay the outstanding balance if the buyer defaults. The agency imposes credit guidelines on borrowers, however, and applies a dollar limit to the mortgages it will insure.
Location, Location, Location
FHA loan limits vary with the location of the property. As a general rule, the FHA will limit its insurance coverage to 115 percent of the median selling price of homes in the same category and the same location. The limits also vary with the type of property involved. In Alameda County, California for example, the limit was $625,500 in 2015 for a single-family home, $800,775 for a duplex, $967,950 for a triplex and $1,202,925 for a four-plex. The FHA also sets a minimum loan limit or floor, which is the lowest dollar amount that can serve as a loan limit. The agency pegs the number to the national conforming loan limit: $417,000 for a single-unit property in 2015. The FHA floor is equal to 65 percent of that number, or $271,050. The loan limit in your county can't be lower than this, no matter how low selling prices are running.
Conforming Loan Limits
Conventional mortgages are not guaranteed by the FHA or any other government agency. But they must conform to guidelines and limits set out by agencies such as Fannie Mae and Freddie Mac. These entities buy and sell mortgages in order to maintain a strong market in home loans among banks and lenders. As of 2015, the conforming loan limit reached $417,000 for a one-unit property in most areas, up to $721,050 in high-cost housing areas. The mortgage-buying agencies will not take loans above these limits, meaning those loans likely will carry a higher interest rate to compensate lenders for added risk.
The Problem with Jumbos
Plenty of properties are valued higher than the FHA and conventional loan limits, of course, and those buyers still may need financing. A mortgage that exceeds the limits is also known as a jumbo loan. In order to secure FHA financing on such a property, the down payment would have to cover the excess amount. Conventional loans require that the homeowner have private mortgage insurance as long as the homeowner has less than 20 percent equity in the property.