Is This a Joke? FHA Loan Limits Set to Fall, Down Payments to Rise

Batten down the hatches, because the U.S. housing market is headed straight into another storm. That’s because limits for Federal Housing Administration (FHA) loans are set to shrink significantly on Oct. 1, 2011, and the only people who can steer this ship to safety are off enjoying a long summer holiday. 

If you’re looking to purchase or refinance a home valued between $271,050 and $729,000, take note: You may be ineligible for an FHA-backed loan.

A little FHA background

Established during the Great Depression to help stabilize the market, the FHA loan program has long made home ownership an affordable reality for millions of Americans. The program backs mortgages for creditworthy buyers who don’t necessarily make the cut for a traditional bank loan. For example, FHA offers qualified home buyers financing with as little as a 3.5% down payment and credit score as low as 620. If you can put 10% down, your credit score can be as low as 500. In turn, borrowers who take an FHA-backed mortgage pay a premium of roughly 1% annually. 

FHA currently provides loans for up to $729,750 in the nation’s most expensive real estate markets. But right now, when it’s needed most, the program is being limited. 

It’s been widely reported that unless Congress intervenes before Sept. 30, 2011, loan limits for conforming mortgages (those that FHA, Fannie Mae, or Freddie Mac will back) will drop to $625,500 from $729,750 in the nation’s priciest real estate markets, such as San Francisco and New York. 

But what the media has failed to highlight is the impact of the decreased conforming mortgage limit on regions that fall below the maximum loan ceiling. Few areas of the country will be spared: The limit decrease would affect 669 counties in 42 states and the territories.

The average national decline would be around $68,000. In some areas, it’ll shrink by only $1,000. But in Monterey, Calif., for instance, it’ll decrease by almost $250,000. FHA loans correspond to an area’s median home price, so the limits for FHA-backed loans vary regionally.

Making a tough housing market unnecessarily tougher

The NATIONAL ASSOCIATION OF REALTORS® estimates that 59% of all owner-occupied housing will be ineligible for affordable FHA financing. If families can’t sell their homes and others can’t buy, how do you think that will affect your buying power? Or for that matter, your property value? 

Adding insult to injury are proposed reforms to FHA standards. In an attempt to further limit the government’s role in the housing market, some lawmakers want to change the requirements for an FHA loan, moving the minimum down payment to 5% from 3.5%.  

So let’s recap. Mortgage limits are being lowered as requirements for FHA loans are being raised. This must be Capitol Hill’s idea of a joke. How exactly will this help the housing market or America’s economy?   

How do you think the change in loan limits would affect the housing market?