The FHA was formed in 1934 to help people mired in the Depression era economics buy a home. Since those days, the program, administered by the U.S. Department of Housing and Urban Development (HUD), has always focused its efforts on helping working and middle class Americans to buy modest homes.

FHA works by promising to purchase loans that meet its guidelines from commercial lenders and insure them against default. In keeping with HUD’s goals, there has always been a limit on the size of the loan the FHA will insure–because FHA primarily serves those purchasing relatively low-to-mid-priced homes.

The FHA loan cap is adjusted annually and varies from region to region. In 2009, the largest FHA loan limit is $729,750, and that is for the areas of the country with the highest home prices. For information on FHA loan limits in your area, click HERE and choose your state and county.

The loan cap figure is derived from the median cost of a home in any given metropolitan statistical area (MSA). Thus while the biggest FHA loan you can get for a single family home in the San Francisco area is $729,750; in Springfield, Missouri, the largest loan available under FHA’s rules is $271,050.

Mortgages in higher amounts than the FHA caps permit must be acquired through other lending sources working without FHA partnership. Conventional loans (those that conform to Fannie Mae or Freddie Mac guidelines and loan amounts) are also available without FHA involvement. Underwriting for these programs is stricter, in general requiring higher credit scores and larger down payments for approval.

If you started out with a subprime loan and your credit has improved, you may be eligible for an FHA refinance to obtain a lower interest rate.