Changing FHA Loan Limits

by Peter G. Miller
July 16th, 2007

Deep within the federal government is something known as the Office of Federal Housing Enterprise Oversight (OFHEO). No, this is not a secret entity or part of the CIA. Instead, it’s an agency which oversees Fannie Mae and Freddie Mac.

One of the functions that Fannie Mae and Freddie Mac perform each year is to establish the conventional loan limit. The conventional loan limit is important because if you get a loan below the limit you have conforming financing — above the limit you have a “jumbo” loan and a somewhat higher interest rate.

For 2009 the conventional loan limit in the lower 48 states is $417,000 for a single-family house. The limit is higher for two-unit properties ($533,850), three-unit properties ($645,300) and four-unit properties ($801,950). The limit is also 50 percent higher in Alaska, Hawaii, Guam, and the U.S. Virgin Islands. For properties with multiple units, borrowers must live in one unit to qualify for FHA financing.

There is another important point about the conventional loan limit: The most money you can borrow under the FHA loan program in a high-cost area is equal to 87 percent of the conventional loan limit.

So, if the conventional loan limit rises so does the FHA limit.

OFHEO is now wondering how to deal with the conventional loan limit when home prices fall — as they did in 2006. Since home prices went down the conventional loan limit should also have fallen. It didn’t, instead the 2006 loan limit was allowed to stay in place.

Why is this a big deal? Risk. If a higher conventional loan limit is not justified by market values, then lenders have additional risk. Also, if you’re a borrower you want a higher rate so you can get a bigger loan at less cost.

OFHEO is now asking for comments regarding how, if at all, the present system should be changed. If you have an opinion, you must get your comments in quickly. Comments are due by July 19 and should be addressed to Alfred Pollard, General Counsel, OFHEO, at either 1700 G Street N.W., 4th Floor, Washington, D.C. 20552 or ofheoguidancecomments@ofheo.gov. For details, see: http://www.ofheo.gov/media/pdf/confloanlimguidance62007.pdf.

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4 Responses to “Changing FHA Loan Limits”

  1. Doug Lober Says:

    Mortgage Lenders Form FHA Alliance

    Nearly 90 mortgage lenders have formed an alliance to support passage of legislation to “reinvigorate” the Federal Housing Administration so it can provide safe and affordable financing for homebuyers, as well as a lifeline for subprime borrowers who are in trouble. “We believe that a greater FHA presence in the mortgage market could have prevented the recent turmoil and that FHA is well-positioned to offer borrowers in trouble a simple and practical solution that will bring much-needed stability to local real estate markets,” the FHA Alliance members say in a letter to leaders of the Senate Banking Committee. The House Financial Services Committee has approved a bill that raises the FHA single-family loan limits and allows the FHA to charge risk-based premiums and offer zero-downpayment loans. The Senate Banking Committee is scheduled to hold an FHA hearing on July 18. The formation of the alliance shows that lenders are “very interested” in the FHA reform legislation and view the changes as “very valuable to the housing finance system,” said mortgage banking consultant Brian Chappelle. National companies such Bank of America, Countrywide Financial Corp., and SunTrust Mortgage, as well as regional companies such as Mortgage America, are alliance members.

  2. Peter G. Miller Says:

    Thanks for your note.

    Tell us more.

    For instance, do 90 lenders also support lower periodic and lifetime caps that the FHA program used to have?

    Are they concerned that the GAO estimates that under FHA reform 20 percent of those who now qualify for FHA financing would NOT be able to get a loan under the program?

    Are they bothered by the idea that under FHA reform 37 percent of current borrowers would pay higher insurance fees?

  3. Bobby Christian Says:

    Can you tell me if FHA is prepared to move the LTV to 100% if they decide to do away with Down Payment Assistance programs?

    Thank you!

    Bobby Christian

  4. Rob Aubrey Says:

    Peter is by far more informed than I am on FHA loans. But I heard from a lender that I work with that in light of all that is going on in the lending world, that had momentum but has stalled and possibly cutting the three percent to one and a half.

    Again something I heard and not substantiated.

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