Chicago Market Update: FHA Loan Limits Restored to Original Levels

The U.S. housing industry has scored a victory with House and Senate votes to raise the size of mortgages backed by the Federal Housing Administration to $729,750, starting for a One-Family.  President Obama signed into law  on Friday, November 18,  2011, effectively reinstalling the higher conforming loan limits for FHA through the end of 2013.   After a brief return to lower, pre-2009 levels, effective October 1, 2011. The range in the Chicagoland area was from $365,700 (One-Family) up to $703, 250 (Four-Family).  The loan limits were revised  to $410,000 (On-Family) up to $788,450 (Four-Family).  The loan limits may vary from state to state, from city to city and from county to county. Check your local FHA loan limit.

The move creates additional mortgage financing possibilities in more than 650 U.S. counties, and promises to increase the FHA’s mortgage market share, which has grown from 6% in 2007 to roughly 30% today.

The change in FHA loan limits also marks the first time that FHA loan limits exceed those of conventional mortgage-backers Fannie Mae and Freddie Mac.

Conventional loans remain capped at a maximum of $625,500.

For home buyers in Chicago and nationwide, FHA-insured mortgage offer several advantages over comparable conventional loans, the most commonly cited of which is that FHA-insured loans require a down payment of just 3.5 percent.

FHA-insured mortgages carry other advantages, too, however.

First, FHA home loans are not subject to loan-level pricing adjustments (LLPA). This means that, all things equal, buyers and would-be refinancers with credit scores below 740; or, who live in multi-unit homes; or, who have high loan-to-values are not subject to additional loan fees as a conventional mortgage applicant might.

Second, after 6 months of on-time payments, FHA-backed homeowners are eligible for the FHA Streamline Refinance. The FHA Streamline Refinance is among the simplest loan products for which to qualify with no appraisal required. Even if you’re “underwater” on your mortgage, you can still be streamline-eligible.

And, lastly, at least in today’s market, FHA mortgage rates are below those of the conventional market.

The downside of FHA financing, however, is that all FHA mortgages require mortgage insurance and FHA mortgage rates are often higher versus a comparable conventional loan. This means that, although its mortgage rate may be lower, the payment for an FHA home loan may be higher as compared to a Fannie Mae mortgage with similar credit traits.

FHA loans aren’t always optimal, but with higher FHA loan limits, expect the FHA’s market share to increase.

Courtesy of Todd Johnson, Guaranteed Rate