Late last week, Congress agreed to reinstate the temporarily inflated FHA loan limits that fell on October 1.
So for the next two years, homeowners in high-cost regions of the country will be able to take out FHA loans for amounts up to $729,750, as opposed to the $625,500 cap that previously applied.
While this may sound like a win for the badly bruised housing market, a recent study suggested otherwise.
Back in July, a pair of George Washington University researchers claimed that higher FHA loan limits would do little to positively affect housing.
In fact, they noted that the FHA loan limit could be slashed in half and still serve 95 percent of its historic target market.
But we all know times have changed, and the FHA’s target market isn’t the underserved, low-income borrowers of times past.
These days, it’s anyone who doesn’t want to come up with a large down payment to purchase a home.
Thanks to their flagship 3.5% down loan program, the FHA’s market share has risen to about 30 percent of total loan origination volume, putting pressure on capital reserves and increasing the likelihood of a taxpayer bailout down the road.
All this at a time when we’re supposed to be shrugging off government support and bringing private capital back into the mix. Hmm.
For the record, those researchers feel the FHA should hold at most a nine to 15 percent share of the mortgage market and lower the max loan limit to a mere $363,000.
Fannie and Freddie Still Capped at $625,500
Meanwhile, the conforming loan limit for mortgages backed by Fannie Mae and Freddie Mac is staying put at a lower $625,500, likely because any more risk thrown their way would be considered unacceptable.
Why? Well, most homeowners seeking a loan over $625,500 probably won’t want an FHA loan either because of the cost of mortgage insurance. This is one of the disadvantages to an FHA loan.
So they may either opt to either bring in more cash to drop the loan amount below the conforming loan limit, take out a combo loan, or bite the bullet and go with a jumbo loan if they can find one.
The upside is that it’s generally much easier to qualify for an FHA loan than a jumbo. But it’s still bittersweet news for most I’m sure.
And it makes you wonder why interested parties, such as realtor and home builder groups, pushed for the increased limits.
It doesn’t sound like it’ll have much of a meaningful effect. Perhaps a more important measure would be restoring jumbo loan financing and other private capital to the housing market.
But asking the government to do that doesn’t really make sense. It needs to happen organically with less government involvement, and at the moment, it’s not looking very likely.
If your loan amount is anywhere close to these limits, do your best to stay at or below them to receive the most favorable pricing and the widest array of financing options.