A steadily improving real estate market has convinced the powers that be that it is time to increase the FHA loan limits. The new policy will be put in place beginning the first day of January in the year 2019. As of this writing, over 3,000 counties around the entire country will benefit from the higher loan amounts.
Calculating the FHA Maximum Loan Limit
According to the National Housing Act, the median price of homes is the driving factor for the loan limits. The Department of Housing and Urban Development is responsible for monitoring home prices. The maximum loan amount must be equal to 115% of the area’s median price. Since home prices vary from county to county and state to state, this is the reason why the loan limits vary across the country.
In 2018, the floor limit of an FHA loan was $294,515. That amount will increase in 2019 to $314,827. In the high-cost areas, it is possible to get an FHA loan for as much as $726,525.
Real Estate Has Trended Up
Although the National Housing Act requires an annual review of home prices, this does not mean that the overall real estate market is always trending up. For instance, in 2016, just under 200 counties across the nation received an increase in the FHA loan limit. But that changed drastically in 2017 when over 2,900 counties received higher loan limits. The new increases set to take place this year shows that the overall market is healthy and continuing to improve.
How do Higher FHA Loan Limits Help Borrowers?
Banks, credit unions, and mortgage lenders routinely advertise their rates and services across a range of media such as radio, tv, and the internet. No doubt this news about the increased rates will quickly make its way in the rotation of headlines. But how does the change in loan limits benefit the borrowers?
First and foremost, FHA has more lenient underwriting and credit guidelines to than most other kinds of loans. The low-down payment requirement and lenient credit standards make it appealing to first time home buyers as well as people looking to refinance to a better rate.
Second, the higher loan limits will mean that a larger number of the existing homes on the market will be available for an FHA loan. For example, a home that went on the market on December 15, 2018, priced at $310,000 could not be considered for an FHA loan. Thanks to the new loan limits, those homes and others priced in the same range can be FHA candidates.
In high-cost areas, like California, New York, and Alaska, the higher limits allow people to use an FHA loan rather than a jumbo mortgage. This can literally save borrowers thousands of dollars by purchasing a home with a modest down payment rather than the 10% to 20% down payment often required by Jumbo loans.
Third, increasing the number of available homes that can be purchased will lead to an increase in home purchases in most areas. Numerous studies have shown that homeownership is a primary factor in forming a strong, stable home life that can contribute positively not only to the family but to the surrounding community.
Impact of FHA
Since its inception, FHA has played a major role in the housing market. The latest market reports from HUD show that FHA represents around $44 Billion in purchase transactions every 3 months. For years, the FHA mortgage has been frequently used by first time home buyers as their loan of choice.
Lenient Underwriting and Credit Guidelines Is Key for FHA
The main reason FHA is used so often by first time home buyers is the ease of use. There are 3 main criteria that attract so many people to use this type of mortgage loan.
- Lenient credit requirements
- Low down payment
- No restriction on property location
People that are able to qualify for an FHA mortgage are often members of the middle class with solid work history and a relatively secure feeling about their future employment. The fact that an FHA loan will allow borrowers to obtain a home with a relatively inexpensive down payment opens up the possibilities for millions of people.
Along with these features, FHA also provides the 203k loan for repairs and improvements. This loan allows borrowers to receive extra money, above the purchase price, to be used for repairs or improvements or both. The program is offered 2 different ways. One allows a modest amount of money and the other allows much more money for extensive repairs. With either version of the loan, borrowers receive one mortgage that will cover the purchase price and necessary funds for major repairs and make one monthly payment with one interest rate. This is ideal for people that are able to locate a property in a great location but the home in need of a bit of work.
The FHA mortgage loan is a key piece of our real estate market. Increasing the loan limits to match the trends in home prices is a good thing. As long as the market remains healthy with good demand for housing and an adequate supply of homes, the overall real estate market should continue to thrive for the upcoming year.
The following illustrates FHA loan limits for low cost and high-cost areas:
The FHA national low-cost area mortgage limits, which are set at 65 percent of the national conforming limit of $484,350 for a one-unit Property, are, by property unit number, as follows:
- One-unit: $314,827
- Two-unit: $403,125
- Three-unit: $487,250
- Four-unit: $605,525
The FHA national high-cost area mortgage limits, which are set at 150 percent of the national conforming limit of $484,350 for a one-unit Property, are, by property unit number, as follows:
- One-unit: $726,525
- Two-unit: $930,300
- Three-unit: $1,124,475
- Four-unit: $1,397,400