August 19, 2017

FHA Loan Limit Reductions Expected To Have Small Impact On Borrowers

On or after October 1, 2011, FHA loan limits will be reduced in 20% of the counties that are eligible for FHA financing. The FHA currently insures loans in 3,334 counties of which 669 will be subject to lower loan limits.

Due to the severe downturn in the economy and the fear that banks would restrict mortgage lending, Congress authorized an increase in FHA loan limits in February 2008 under the Economic Stimulus Act.  The temporary increase in FHA loan limits allowed financing up to 125% of the median home price and up to 175% of the conforming loan limits allowed by Fannie Mae and Freddie Mac. Prior to the expanded loan limits enacted under the Economic Stimulus Act, FHA loan limits had been set at 95% of a county’s median home price and capped at 87% of the $417,000 conforming loan limit established by Fannie and Freddie.

Despite the hysterical reaction from the real estate industry that the decreased loan limits would adversely impact mortgage lending, the effect on lending is expected to be minor.  During the height of the financial crisis, jumbo mortgage pricing was several points higher than on conforming loans as banks priced in a higher risk factor. As mortgage financing stabilized, rates on jumbo mortgages have dropped considerably and financing is readily available to qualified applicants for both jumbo and conforming loans.

Estimates by HUD of the number of mortgage transactions that may be affected by the higher loan limits also indicate a small impact on the mortgage and housing industry. According to HUD, if the lower loan limits had been in effect during 2010, only 3% of total loans representing 6% of loan volume ($14.2 billion) would not have been eligible for FHA financing. During 2011, only 2% of FHA loans would have been impacted by the higher loan limits.

The higher loan limits will have zero impact on FHA streamline refinances since borrowers with loan balances above the new lower loan limits are still eligible for refinance. The change in loan limits will also have no impact on the FHA reverse mortgage program (Home Equity Conversion Mortgage) since the loan limits for this program are separately established.

HUD has produced a chart of “Counties Affected by Possible Decrease in FHA Loan Limits for Loans Originated on or After October 1, 2011”

FHA LOAN LIMITS

The FHA program was originally designed to assist first time home buyers of modest means in purchasing a home. FHA financing for applicants purchasing $700,000 homes seems to be far outside of the scope of the FHA’s mandate of assisting first time home owners in finding and qualifying for affordable housing.

Potential FHA applicants can find the loan limits for each county in which FHA loan are done at FHA Mortgage Limits.