Changes in FHA loan limits to impact few borrowers

by Peter G. Miller
June 20th, 2011

The FHA loan limit will fall as of Oct. 1, 2011, an event which has set off concerns that Federal Housing Authority (FHA) mortgages will be unavailable to lots of borrowers.

Down and out for high loan limits

Such worries are grossly overblown. Here’s why:

The FHA loan limits–as well as conventional loan limits–were increased on a “temporary” basis in 2008. Under the new rules the top FHA and conventional loan limits were the same–$729,750. Also, the FHA loan limit in most areas in the contiguous 48 states was set at 125 percent of the median house price. (There were higher FHA loan limits in Alaska, Guam, Hawaii, and the Virgin Islands and the reverse mortgage limit was $625,500.)

You can see how the 2008 standards caused problems.

First, if the FHA and conventional loan limits are the same in high cost areas it means that loan products could be compared straight up without an artificial limit as to the size of FHA mortgages. In other words, there could be open competition for borrowers.

Second, if the highest FHA loan amount was equal to 125 percent of the median house price in most counties, that should mean the FHA loan limit would decline in most areas because, ahem, home prices have been going down. To get around this, the government established a policy which said that loan limits could not decline below the 2008 standards, meaning that where home prices fell the most the FHA loan limit could be far more than 125 percent of the median price.

Now, however, as of Oct. 1, 2011 the top FHA loan limit will drop from $729,750 to $625,500.

Why lower limits make sense

Are the lower limits a problem?

Not hardly.

HUD reports that through April of this year “approximately 2 percent of endorsed loans by count (6,673) and 7 percent by dollar volume ($2.8 billion) would have been affected.” Translation: 98 percent of all FHA borrowers would be fine.

Seen another way, among 3,334 counties FHA loan limits will decline in 669 areas, or 20 percent. There will be no impact in 80 percent of the counties served by the FHA loan program.

FHA going back to its roots

More importantly, the FHA should not be making gigantic loans.

The purpose of the FHA has never been to fund the home choices of the rich. Instead, the idea since the 1930s has been to help first-time homebuyers and individuals with low and moderate incomes.

You can see this in the latest FHA figures for April: 93,394 mortgages worth $16.8 billion were insured. That’s an average of $179,883 per loan.

If folks need a mortgage above $625,500 there’s no shortage of options. Lots of lenders make such loans and when they do there’s no reason for the FHA to be involved. Private-sector lenders charge a premium for jumbo financing but then borrowers who want such enormous mortgages ought to be able to pay a somewhat higher rate in exchange for such massive loans.

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