FHA loan limits may be lowered


In 2009 about 56% of all mortgages for a home purchase were FHA-insured, up dramatically from 6% in 2007, according to a February report from the George Washington University School of Business. According to the Mortgage Bankers Association, 75% to 80% of FHA purchase loans are for first-time home buyers.

The FHA currently can insure loans of up to $729,750 in high-cost markets, but the Obama administration recently recommended that those higher limits, which vary by market, be allowed to expire in October 2011. That would push the top limit down to $625,500, shrinking the pool of eligible borrowers.

And those loan limits may be reduced even further.

While some in the industry say FHA loan limits should remain elevated until the housing market has stabilized completely, most agree that for the FHA to stay true to its mission of helping low- and moderate-income Americans, the limit must come down over time.

For example, someone getting a $662,500 mortgage [the loan limit for Sonoma County, Calif.] clearly is not a low-income person. The true intention for the FHA’s role is to help families that otherwise wouldn’t be able to buy a home.

The loans valued at the highest levels, or more than $350,000, are performing about 20% worse than the smaller loans that are representative of more traditional FHA loan amounts. Serious delinquencies increased as the allowable loan limits went up according to the George Washington University report.

More information about FHA loan programs.

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