Will the FHA Loan Limit Rise to $635,100?

by Peter G. Miller
January 25th, 2008

Can you imagine if the FHA mortgage limit is increased from $362,790 to $635,100? It could actually happen in the next few weeks.

Rumors are swirling around Capitol Hill that the House will raise the conventional loan limit under a stimulus bill from the current $417,000 ceiling to $625,000 or even $730,000 in high-cost areas.

No one knows at this writing if such proposals will pass in the House, whether they will be acceptable in a Senate version of a stimulus package or whether the President would sign such a bill.

But, for the moment, let’s imagine that such an increase passed.

Under current rules, the FHA loan limit is equal to 87 percent of the conventional loan limit. Since the conventional loan limit is $417,000 at this time it follows that the FHA loan limit in high-cost areas is $362,790 for a single-family home. There is also an FHA loan limit for low-cost areas that is equal to 48 percent of the convention al loan limit for single-family homes, or $200,160. The conventional limits are 50 percent higher in Alaska, Hawaii, Guam, and the U.S. Virgin Islands.

Now, imagine that a $730,000 conventional loan limit passed with the stimulus package. And, imagine that the FHA loan limit remained 87 percent of the conventional loan benchmark. In this situation the maximum FHA loan would be increased from $362,790 to $635,100.

Will this happen?

There is huge pressure to pass a stimulus package — but not ANY stimulus package. The Senate is likely to strip out some of the provisions which appear in the House measure, either in its own bill or in conference.

The $730,000 conventional loan limit has been heard around Washington for much of the past year and it is a proposal which has gone nowhere. Ditto for higher FHA limits –
notice that ”FHA Modernization” has yet to pass. The reason: Concerns about risk to the FHA insurance pool and worries about Fannie Mae and Freddie Mac.

Moreover, there is substantial opposition to the loan limit increase since it would raise the amount of money Fannie Mae and Freddie Mac could provide for single-family borrowers. Fannie Mae and Freddie Mac are “GSEs” — or government-sponsored enterprises, companies that were once federal agencies which have now been spun off into the private sector.

The head of the federal agency that oversees Fannie Mae and Freddie Mac, James Lockhart, director of the Office of Federal Housing Enterprise Oversight (OFHEO) says “we are very disappointed in the proposal to increase the conforming loan limit as we believe it is a mistake to do so in the absence of comprehensive GSE regulatory reform. To restore confidence in the markets we must ensure that the GSEs’ regulator has all the necessary safety and soundness tools.

“Yesterday Chairman Dodd talked about moving a GSE reform bill early this year. We are ready to work with him and the Senate Banking Committee. We will also be working with Fannie Mae and Freddie Mac to ensure that any increase in the conforming loan limit moves through their rigorous new product approval process quickly and has appropriate risk management policies and capital in place.”

Take that last sentence seriously. It suggests to me that if the higher loan limits are passed they will only be available to borrowers with unusually-pristine credit.

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This entry was posted on Friday, January 25th, 2008 at 2:47 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

4 Responses to “Will the FHA Loan Limit Rise to $635,100?”

  1. court Says:

    You know what the real drag about this is? Millions of us that live in high cost areas (like L.A. and San Diego) have been waiting for this market correction so prices will come down into an affordable range. Now this bailout comes along and props up the mid price range properties because more people can afford them again, and it bails out all the speculators from high interest jumbo loans.

    What a crappy system!

  2. greg Says:

    you refer to the formula (on fha loans in high cost areas only)–since it did pass yesterday–what would the calculation be in arizona—-125% of the median price in maricopa county or 87% percent of the the GSE limit?


  3. Lillia Morales Says:

    Since it was passes on Feb 7th what would the amount be for Illinois?

  4. Bill Says:

    This is great and I hope it passes, yesterday. If you have tried to get a jumbo loan lately, you will have found that no lender will touch them. With perfect credit I was quoted 8.2% by Ditech. The best I’ve found so far is 7.5% while the prevailing conforming is 5.5%. Not only is this unfair to those of us in higher priced markets, this situation is killing these markets and values are falling, causing more foreclosures. Our market is not overpriced either. When the money was flowing, houses appreciated at a moderate rate and the jumbo rates were the same as conforming. But if these rates continue to discriminate against those above $417,000, anything above that threshold will be less desirable and we will see a shift in equity positions and more distressed homeowners and distressed banks.

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