FHA loan limits could go lower in high priced housing markets

by Karen Lawson
September 27th, 2010
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The Wall Street Journal reports that FHA may be planning to reduce its loan limits for high cost housing markets. Unless FHA extends the current mortgage loan limits, FHA loan limits in high cost areas could fall to $625,000. This amount may provide many homeowners with the mortgage amounts needed to purchase pricier homes, but in areas such as New York and San Francisco, borrowers may be limited to conventional mortgage loans.

FHA loans: Maximum mortgage amount established by local markets

The National Association of Realtors notes that one in five counties in the US including most of the state of California could be impacted if FHA lowers its current loan limits. Historically, loan limits have been set at 115 percent of local median home prices, but FHA currently calculates its upward loan limit at 125 percent of local median home values. Given falling property values in much of the nation, this year’s loan limits are likely to be lower in many areas as last year’s formula for calculating maximum FHA loan amounts was based on “real estate bubble” prices that are expected to be significantly lower this year.

Current FHA loan limits won’t expire until December 31, 2010, but real estate pros are concerned that unless Congress passes an extension, or issues new loan limits by early November, mortgage lenders may be reluctant to underwrite mortgage loans at current loan limits.

Need down payment help? Check out government homeowner assistance programs

State and local housing finance agencies provide assistance for first time home buyers and others by offering low cost “silent” second mortgage loans to eligible borrowers; in many cases these loans are offered at low rates and do not have to be repaid until you vacate the home you’re buying. Income limits may apply (these are also based on locale) and first time buyers are generally defined as anyone who hasn’t owned a home in the past three years. Cities, counties, and community redevelopment agencies may also sponsor buyer assistance programs. Real estate professionals can help you locate programs and participating mortgage lenders in your area. These programs assist buyers by providing cash for meeting down payments and closing costs; should FHA lower its loan limits, housing finance agencies may assist buyers by providing needed cash. There is more than one way to buy a home, and combining an FHA loan with a local or state housing finance program can assist buyers in high cost areas raise the cash needed for buying a home.

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