How will FHA loan-limit changes impact borrowers?
January 14th, 2014
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Beginning January 1, 2014, new loan limits were put in place by the Federal Housing Administration (FHA). While the current standard loan limit in areas with low housing costs will remain the same at $271,050, the new limit for the highest cost housing markets have been reduced from $729,750 to $625,500 for a one-unit property. Loan limits vary by county, with approximately 650 counties impacted by this change.
The higher FHA loan limits have been in place since 2008 when they were established by Congress as part of the Economic Stimulus Act as an emergency measure to make sure that borrowers still had access to mortgage loans.
FHA refinancing and new loan limits
While the new loan limits apply to homebuyers who want to use an FHA 203b loan to purchase a home, they also apply to refinancing homeowners who currently have a conventional loan rather than an FHA loan. However, borrowers with an existing FHA loan who want to take advantage of the FHA streamline refinance program can refinance even if the size of their loan balance is above the new loan limits.
Borrowers are attracted to FHA loans because FHA’s requirements in terms of credit guidelines are looser than the requirements for conventional loans, and these loans also require a down payment of just 3.5 percent. However, now that limits have been lowered, these borrowers will have several options to consider, such as:
·Buying a less costly house so that they can keep their loan amount under $625,500.
·Finding additional funds for a larger down payment to reduce the size of the loan. FHA loans allow gift funds to be used for a down payment, so some borrowers may be able to increase their cash availability with gifts from relatives.
Alternatives to FHA loans
Borrowers who need to borrow more than the FHA loan limits for their housing market will need to apply for a jumbo loan. In order to qualify for a jumbo loan, whether for a purchase or refinancing, borrowers typically need to make a down payment of 20 percent or more or have home equity of at least 20 percent. In addition, jumbo loan lenders typically want borrowers to have a credit score of at least 700 or higher and sufficient cash reserves to minimize the risk of the loan.
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