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Due to the recent downturn in mortgage lending, the government made a critical change to FHA loan limits in hopes of stimulating mortgage activity across the nation. Fortunately, this change finally modernized loan limits in many high-cost areas where borrowers were previously unable to take advantage of FHA home loans. Although the current loan limits are only guaranteed until the end of 2009, most expect the temporary increase in limits to be extended for another year.

How Have Modernized Loan Limits Changed FHA Home Loans for Borrowers?

Government Increases FHA Loan Limits as Home Financing Becomes More Difficult

When mortgage lenders tightened underwriting requirements, many potential buyers and homeowners found it near impossible to get a mortgage. ALT-A, subprime, and other lending options seemed to disappear overnight, and Fannie Mae and Freddie Mac were not able to assume that burden. The Federal Housing Administration (FHA) loan was still available, but many were unable to take advantage because of the strict loan limitations struggling to keep up with current home prices.

Finally, the FHA loan limits for high-cost areas was temporarily increased to $625,500 in 2008. And as part of the American Recovery and Reinvestment Act of 2009, the latest government action has once again increased this upper limit to $729,750 until the end of 2009. Despite being mostly pressed by government reaction to increase mortgage activity, this change has finally modernized limits to current home prices in many areas. As a result, more borrowers have become eligible to finally take advantage of FHA home loans.

First Time Home Buyers and Mortgage Refinancing

While some lenders often turn away borrowers with low credit scores and high loan-to-value ratios, borrowers who have trouble refinancing their home loans often find FHA mortgage lenders have more flexible guidelines. For example, FHA if a borrower has little credit history, FHA does take into account compensating factors such as higher household incomes and larger reserves.

When home buying also came to a halt, the modernization of FHA loan limits helped many first-time home buyers obtain their first mortgage. For decades, FHA mortgage lenders have offered buyers the flexibility of lower down payment options and closing costs assistance. And with the increase in FHA loan limits, buyers no longer have to limit their housing options as much due to constraining loan limits.

How Will These New Loan Limits Affect Your Mortgage?

In short, these limits can basically determine whether or not your home will be eligible for a FHA home loan. Since the Federal Housing Administration only insures mortgages, approved lenders originate an FHA mortgage only if it meets the administration's requirements. Additionally, the increase helps consumers avoid high cost loans just because their balance falls outside of conforming loan limits. Jumbo loan rates are considerably higher than conformaing or FHA rates,and when FHA limits exceed the conforming limit, borrowers can take advantage of the lower FHA rate.

Where Can You Find Out The Current Loan Limits For Your Area?

If you're already working with a FHA mortgage lender or broker, your agent should have all the numbers concerning mortgage limits based on different counties and cities. If you'd like to check the loan limits and other FHA guidelines yourself, you can visit HUD's Website, which contains a search option to check these figures as well. Once you know you're eligible under the loan limit requirements, you can then start shopping FHA mortgage lenders and begin comparing mortgage quotes.


Heindrick So
Heindrick So is a mortgage consultant at a local Bay Area Real Estate Brokerage--specializing in residential wholesale lending. Heindrick frequently contributes to various finance columns, ranging from home loans and mortgages, debt management, and other personal finance topics.