FundMyRemodel.com Mortgage Loan Update: FHA And Conventional Maximum Loan Limit Of $729,750 In High-Cost Counties Set To Move Lower At End Of Year Without Extention From Congress

25 09 2010

Two years ago to help resuscitate the housing market, Congress allowed the Federal Housing Administration, Fannie Mae and Freddie Mac to back loans as high as $729,750 in some locales; well above the standard $417,000 limit. Without an extension on these new limits, as today’s WSJ story notes, that $729,750 ceiling would probably fall to $625,500 next year.

The National Association of Realtors says that nearly one in five U.S. counties—including almost the entire state of California—would see FHA loan limits fall if the current extension expires.

But there’s another issue at play here: loan limits in even more counties could fall because of temporary extensions that have allowed the FHA to guarantee larger loans. There’s a national floor for FHA loan limits, which is currently set at $271,050—this is different from the $417,000 floor used for Fannie and Freddie. That isn’t likely to change. There’s also a national ceiling, currently set at $729,750.

Most counties fall somewhere between the floor and the ceiling. That’s because FHA loan limits vary by region and are pegged to local median home prices. Under normal law, those limits are set at 115% of the local median price; under the expanded limits that are currently in effect, the limits are set at 125% of the local median price.

The current limits are also higher because they’re set using housing bubble-era median prices, which are significantly higher than today’s prices that would be used to recalculate the new loan limits. This means if Congress doesn’t again extend the higher limits, they’ll be starting from a much lower level next year, and the multiplier effect—115% versus 125%—will be lower, too.

The Obama administration supports extending the loan limits for another year for these reasons. “We’re not talking about wealthy millionaires. We’re talking about the average American’s ability … to finance a home,” said David Stevens, the FHA’s commissioner, at a Senate hearing on Thursday.

The limits don’t expire until the end of the year, but the real-estate industry is anxious for Congress to pass an extension soon because banks aren’t going to wait until Dec. 31. It takes a few weeks to close a loan, so banks are likely to stop accepting deliveries of high-cost loans in November if it’s unclear where the maximum loan limits will be come 2011.

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