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FHA loan limits are increasing: that’s good news for borrowers

Erik J. Martin
Erik J. MartinThe Mortgage Reports Contributor

FHA mortgage loan limits go up in 2018

The Department Housing and Urban Development (HUD) recently announced that FHA loan limits will increase in many parts of the country.  This is big news for borrowers who want to pursue an FHA mortgage loan.

FHA loans are popular because they allow lower FICO scores and down payments. The down payment can be as low as 3.5 percent, in fact. Plus, their underwriting guidelines are more flexible, making it easier to qualify. Loan limits going up is welcome news. It means you’ll be able to borrow more if needed.

Click to see your FHA loan eligibility (Oct 18th, 2018)

Here’s the fine print

In December, the FHA unveiled its new schedule of loan limits for 2018. Most areas of the nation will enjoy an increase in loan limits of 6.4 percent, effective on January 1, 2018.

Only 223 out of 3,234 counties won’t see loan limit changes; 3,011 counties will.

The new loan limit max now increases from $636,150 to $679,650. That’s an extra $43,500. Loan limit minimums rise from $275,665 to $294,515.

These limits are posted online, making it easy to search for FHA mortgage limits in your area.

Why FHA loan limits increased

The FHA had to raise these amounts because it’s required by law to set single-family loan limits at 115 percent of median house prices. Note that in November 2017, the median house price jumped 5.8 percent from a year ago to $248,000. That marked the 69th  straight month of year-on-year price gains.

Daren Blomquist, senior vice president for ATTOM Data Solutions, says the new loan limits make sense.

“Home prices continue to rise,” he says. “This is an effort to keep government-backed loans in line with those rising home prices.”

Tamara Dorris, adjunct real estate professor at American River College in Sacramento, says this is a move by the FHA to stay competitive in a rising housing market.

“Otherwise, the FHA would lose market share,” she says.

Reaping the benefits

Blomquist says this means good things for many buyers.

“It ensures that even borrowers without sterling credit and with lower down payments still have access to home ownership,” he notes.

Dorris agrees.

“This increase will give buyers more choices in homes,” she says. “Plus, it allows buyers a better chance to live in neighborhoods they prefer but may currently be unable to qualify for.”

In addition, she says, “Buyers may get a better rate and lower monthly payment by going with an FHA loan.”

Other pros and cons

Increased FHA loan limits are a positive sign for the housing industry as well.

“Greater access to home ownership that’s in line with rising home prices should help keep demand for housing steady,” says Blomquist. “That steady or even increasing demand means more home sales and rising home prices. And that translates into revenue for those in the housing industry whose livelihood depends on homes being sold.”

Of course, there’s a downside to higher loan limits; it means that housing prices keep going up.

“The hard part is getting incomes to rise at the same rate. That cannot be done with a quick flip of a policy switch, as can higher loan limits,” Blomquist adds. “It cannot help borrowers qualify if their income is not keeping up with home price appreciation.”

Tips to smooth the process

You can help improve your odds of securing an FHA loan by following the advice of experts.

First, “Check your credit score carefully. Repair anything you can on that credit score to get it as high as possible,” suggests Blomquist. You need a credit score of 580 or higher with 3.5 percent down, and 500 or higher with 10 percent down.

Second, get pre-qualified for a loan early in the process. Be sure to choose an FHA-approved lender.

“That way, you can see what you qualify for,” Blomquist adds. “And you can also make any adjustments that may help you qualify for a higher loan amount or more favorable loan terms.”

Be ready to provide plenty of info to your loan officer. You’ll have to prove your income with pay stubs, W-2s, and sometimes your tax returns. And you’ll need to document your financial assets and the source of your down payment with account statements.

Other matters

Borrowers pay an upfront and annual mortgage insurance premium with an FHA loan. The upfront premium equals 1.75 percent of the base loan amount. You can pay it out-of-pocket, finance it by adding it to your FHA loan, or perhaps negotiate to get the seller to cover it. The annual premium rates and terms will vary, depending on your mortgage.

Lastly, be aware that the home you want to buy needs to be up to FHA standards. FHA appraisals are more detailed than conventional (non-government) loan appraisals and focus on the home’s livability.

“FHA loan qualification has not changed much over the years,” says Dorris. “But the main challenge is whether or not your chosen property will qualify. The FHA can be stricter when it comes to any health, safety, and structural soundness issues than a conventional loan.”

What are today’s FHA mortgage rates?

FHA home loans often come with lower mortgage rates than conventional (non-government) home loans. However, you’ll want to consider the total costs, including mortgage insurance, when comparing FHA and other programs. And maximize your savings by comparing quotes from several competing mortgage lenders before choosing a loan.

Click to see your FHA loan eligibility (Oct 18th, 2018)