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FHA Smashes Homeownership Barriers In High-Priced Markets

Pete Gerardo
The Mortgage Reports contributor

Higher 2017 FHA Loan Limits Increase Access To Homes

Consider this number: 753,388.

That’s how many families bought a home with an FHA mortgage in 2015, the most recent data available.

This statistic from Housing and Urban Development (HUD) puts in perspective the massive popularity of this program.

There may be no single more effective tool for home buyers than an FHA loan.

And in 2017, the news just keeps getting better.

FHA loan limits have risen in nearly every county in the U.S. in 2017, giving families in higher-priced areas access to more homes via FHA financing. FHA loans can be had at loan amounts well north of half a million dollars.

Now, more homes in expensive areas are eligible for a 3.5% downpayment and lenient credit score requirements.

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Where Do New FHA Loan Limits Apply?

Home prices rose by more than five percent in 2016.

HUD, FHA’s oversight agency, has raised the national loan limit maximum to a “ceiling” of $636,150. The “floor” loan amount was raised, too, at $275,665.

But many areas between these ranges now have access to higher limits, most of them located in or near major metropolitan areas where home prices have risen faster than the national average.

The following counties are just a few in which FHA loan limits have been increased.

  • Clear Creek County, Colorado. Former loan limit: $458,850. Now: $493,350
  • Plymouth County, Massachusetts. Former loan limit: $523,250. Now: $598,000
  • Franklin County, North Carolina. Former loan limit: $287,500. Now: $300,150

Many other areas have higher limits, such as the Portland, Oregon and Salt Lake City, Utah. In all, various counties in more than twenty states are eligible for bigger FHA loan amounts in 2017.

Verify your new rate (Jul 15th, 2019)

Why Impose Loan Limits On FHA Loans?

Before the FHA announced the updated limits, some experts worried that the agency might decrease the limits. News of the mostly unchanged ceilings should come as a relief to home buyers.

Loan limits are in place to ensure the program is available to those who really need it. Limits are set according to the metro area’s median home price.

The average family can buy the average home with an FHA loan.

Imagine, though, if there were no FHA loan limits.

Nothing would stop a high-net-worth home buyer from purchasing a $5 million property with just 3.5% down.

Typically, jumbo loans require 20-30% down.

Indeed, buyers would enter the high-end housing market using FHA even if they didn’t need the program. The low downpayment requirement would free up cash, allowing them to invest it elsewhere. The loan would essentially be used as an investment strategy.

On a $5 million home, the buyer would save more than $1.3 million in downpayment funds by using FHA over a jumbo loan. The cash would, in turn, be used to buy rental properties, invest in the stock market, or really any investment that gave a greater return than the sub-4% interest rate they would pay on the FHA loan.

This is not the purpose of FHA. Rather, it is a tool to promote homeownership among those buying median-priced homes who do not qualify for conventional financing.

FHA loan limits keep the program available for the typical home buyer, not investors looking for a higher return.

You Might Not Know These Benefits Of FHA

The FHA doesn’t issue loans itself. Instead, it insures the mortgages issued by banks and other private lenders. Historically, this has increased private institutions’ willingness to make loans to people who otherwise wouldn’t qualify for conventional mortgages.

FHA-insured loans are especially beneficial to first-time buyers because the upfront costs are lower, and they don’t need a 740 credit score to qualify.

In fact, borrowers can get an FHA loan with a downpayment as low as 3.5 percent and a credit score of 580. Those with credit scores between 500 and 579 can still qualify, but must make a downpayment of 10 percent.

Another benefit of FHA loans is that the mortgages are “assumable.” In other words, you can use your FHA mortgage and rate as a selling point: the buyer can take over your existing loan no matter how high rates are at that time.

Home buyers pay two kinds of mortgage insurance premium to qualify for the FHA loan. The first is an upfront mortgage insurance premium (UFMIP), which is due in its entirety upfront. Most buyers choose to add it to their loan balance.

The second is an annual mortgage insurance premium (MIP), which is added to the monthly mortgage payment. The amount of both premiums is a small percentage of the loan amount.

These fees keep the program sustainable long-term. FHA buyers of years past have made it possible for you to qualify for a home.

Verify your new rate (Jul 15th, 2019)

Use FHA “Floor” Limits To Buy More Home

In non-metropolitan areas, the FHA calculates its maximum loan limits each year based on 115 percent of the median home price in the area.

Not every area’s limit is based strictly on median home price, however. The FHA’s lowest loan limit, called the “floor” limit, is $275,665. This limit applies to regions that would have lower loan limits strictly based on 115 percent of the median home price.

These are called low-cost areas.

Home buyers in low-cost areas can buy homes that are priced well above area averages. For instance, an area’s median home price is $100,000. Without the FHA “floor” limit, buyers in that area could only buy a home up to $115,000. But buyers can qualify for a home that costs more than twice that price because of the FHA floor limit.

An area where the loan limit exceeds the floor is considered a high-cost area. Using the uppermost limit, buyers can qualify for an FHA mortgage up to $636,150 in areas like Los Angeles County, California, and in many counties around New York, New York.

What Are Today’s Rates?

Today’s FHA loan rates are some of the lowest available this decade. Home buyers are snatching up affordable mortgage payments while they can. Mortgage rates were supposed to have risen already, but it hasn’t happened yet.

Get a rate quote and take this opportunity while it still exists. Only your most basic information is required to get started, and getting a quote can happen in just minutes.

Verify your new rate (Jul 15th, 2019)