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Will lower loan limits hurt FHA borrowers?

by Peter G. Miller
September 28th, 2011

Unless there’s a surprise turn of events on Capitol Hill, the FHA loan limits for high cost areas will be reduced as of October.

Let’s assume that the new and lower limits become the law of the land as scheduled. Just who will be impacted?

“Congress must act now to prevent the loan limits from reverting to lower levels,” Bob Nielsen, chairman of the National Association of Home Builders, said in a statement. “A drop in mortgage loan limits would reduce housing demand, and place downward pressure on home prices in major markets. This would exacerbate the current housing downturn, trigger more foreclosures, impede job growth and endanger the fragile economic recovery.”

Because of these concerns, the NAHB said it’s “engaged in a major grassroots push and association members are being urged to contact their members of Congress and seek their support for immediate efforts to extend the current loan limits.”

Actually, neither home builders nor anyone else has much to worry about regarding real or imagined terrors from reduced loan limits.

Let’s take a look at FHA mortgages. They can give us a fairly good sense of market demands.

Figures provided to FHALoanPros by HUD officials show there were 7.152 million FHA loans outstanding as of mid-September. If we got rid of all the high-priced loans, how many would be lost?

The new FHA loan limit for a single-family home in a high-cost area is $625,500. The old cap was $729,750. The limit is higher in Alaska, Hawaii, Guam and the Virgin Islands.

As of mid-September, 1.08 percent of all outstanding FHA mortgages had an initial balance between $400,000 and $500,000. Most of these loans–a total of 77,241 mortgages–will be routinely available under the new loan limits because they will finance homes in high-priced areas or outside the lower 48 states.

What about

loans with an initial balance above $500,000? The FHA says that such loans represented 0.75 percent of all FHA loan originations. That’s about 53,640 mortgages and–again–virtually all could be made under the new rules.

Where mortgages between $625,000 and $729,750 are needed, there will be cases where FHA financing will be unavailable, but so what? Financing from private lenders will be readily on tap, though perhaps at a somewhat higher cost.

If you’re an absolutist then, yes, some low cost FHA financing will no longer be available once the loan limits fall. But the marketplace impact will be just about zero.

Most people have no loan limit concerns. Falling satellite parts are a bigger worry, and with good reason.

The latest figures show that in July the FHA insured 91,533 single-family loans with a total initial balance of $16.1 billion. In other words, the average loan amount was just $161,001.

No doubt a lot of FHA borrowers are looking at the loan limit debate and saying, “Let the rich folks worry about that stuff. The program works great for me.”

And whether the loan limits are up or down, it does.

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