If you plan to get an FHA mortgage next year, you may have to settle for a smaller loan, depending on where you live. The Federal Housing Administration will reduce the maximum loan limit amount on FHA loans on Jan. 1.
The FHA will reduce loan limits in 650 counties and the national cap for FHA loans in high-cost areas will be reduced from $729,750 to $625,500. Residents of some counties will see loan limits drop to about half of what they currently are.
- Salt Lake County, Utah, will see the limit on FHA loans drop from the maximum cap of $729,750 to $300,150.
- Limits in Hampshire County, W.Va., will drop from $475,000 to $271,000. Merced, in California, will experience a similar drop.
- The Sarasota area in Florida will have loan limits reduced from $442,500 to $285,200.
Why it's happening and why it matters
The FHA says it's adjusting the limits as the housing market recovers so the FHA can concentrate on helping borrowers who are underserved.
The higher loan limits were established in 2008 by the Economic Stimulus Act of 2008 as emergency measures to support the mortgage market and ensure lending availability when private lending options were severely constrained.
Since Fannie Mae and Freddie Mac reduced their loan limits a couple of years ago to $625,500, many borrowers have relied on FHA loans in higher cost areas like New York, says Matt Hackett, underwriting manager at Equity Now in New York.
"Those who did not have a 20 percent down payment could only use FHA in that loan amount bucket," he says.
Looking for loopholes
Starting next year, buyers seeking larger loans may need much bigger down payments because those larger loans will be considered jumbo loans, which have stricter underwriting standards and higher down payment requirements.
If it serves as consolation for buyers with smaller down payments, more lenders are willing to offer second mortgages in these high-cost areas. With a second loan, many of these borrowers may get a better deal with a conventional loan, says Mathew Carson, a mortgage broker at First Capital Group Inc., in San Francisco.
"We have lenders that are now comfortable being in second position to 90 percent of the combined loan to value, which makes it far more attractive to borrowers as it doesn't have the fees of FHA or the costly mortgage insurance for the life of the loan that FHA has."
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