Spring 2011 Mortgage Trends
Handing over house keys
Bigger mortgages will cost more

FHA loans:

  • FHA limits are based on the national conforming loan limit, subject to certain ceilings, floors and percentages applied to local-area median home prices.
  • In most counties, the FHA limit is $271,050. In 620 counties, higher housing costs mean the FHA limit is higher than that -- from $271,250 in three Ohio counties to $729,750 in the same 73 counties where that's also the jumbo conforming limit.
  • On Oct. 1, FHA limits will be changed, up or down, in at least some and perhaps many counties. In no case will a county's limit be less than the lowest limit in 2008, 2009 or 2010.
  • As a result, some borrowers won't qualify for a low down payment FHA loan and instead might choose to get a conforming loan, requiring a bigger down payment or more equity.
  • The limit on an individual borrower's FHA loan is tied to the date of application, so some loans up to the current limit may sneak through after Oct. 1 if an application is in process.

Limited options

The lower limits will have a big impact on borrowers in high-cost housing markets, says Ginny Ferguson, president of Heritage Valley Mortgage in Pleasanton, Calif.

"The folks who currently can qualify with full documentation for a loan of $700,000 or $725,000 are no longer going to have that option," she says. "If they're doing a refinance and their loan amount is higher than $625,500, they're going to have to come into escrow with money to pay down their loan amount. Or if they're trying to purchase a property, they're going to have to put down a larger down payment."

A jumbo may be an alternative; however, the lender marketplace for jumbos experienced a meltdown during the housing crisis and "is still not functioning very well," says Dale Di Gennaro, president of Custom Lending Group in Napa, Calif.

That means borrowers will face tighter guidelines to qualify and the interest rate likely will be 0.5 percentage point to 1 percentage point higher than the rate on an otherwise comparable, but smaller FHA or conforming loan, he says.

Another option is to try to take out two loans, a first within the limit and a second to make up the difference. But that strategy is a long shot, Ferguson says, and still requires a conservative loan-to-value ratio.

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