FHA Increases Loan Limits

Yesterday, President Bush signed into law the Economic Stimulus Act of 2008, which Congress passed on February 7, 2008. The Act temporarily increases the mortgage loan limits for the U.S. Department of Housing and Urban Development’s (“HUD”) Federal Housing Administration (“FHA”) program, in addition to providing certain tax rebates and temporary increases in the conforming loan limits for Fannie Mae and Freddie Mac. As you know, the National Housing Act limits the maximum dollar amount that FHA can insure, and these maximum amounts vary based on the geographic location of the property securing the FHA loan. With regard to FHA-insured loans secured by single-family residences, the Act would increase the loan limit from 87 percent of the conforming loan limit to 125 percent of the median single-family home price in the geographic area. In certain geographic regions where the cost of housing is very high, the Act increases the FHA loan limit to as much as 175 percent of the conforming loan limit. The Act makes clear that, in calculating FHA loan limits, HUD will use the conforming loan limit in place prior to the Act’s passage, which was $417,000. This change effectively increases the FHA maximum loan amount from $362,790 to as much as $729,750 in certain parts of the country. In less expensive markets, Congress increased the FHA loan limit from 48 percent of the conforming loan limit to 65 percent of the conforming loan limit, which would increase maximum loan amounts in these areas from $200,160 to $271,050. The Act also gives HUD the authority to raise these loan limits by an additional $100,000 if market conditions warrant further increase. The Act’s temporary loan limit increases would apply to FHA-insured loans for which a mortgage lender has issued credit approval on or before December 31, 2008. HUD will likely make an announcement regarding the timeframe for loan eligibility at these higher loan limits. Therefore, lenders should wait for guidance from HUD before originating FHA loans with these increased loan limits.This increase in FHA loan limits should spur interest in FHA-insured loans and make this loan product an attractive option for many Americans in both refinance and new home purchase transactions. According to Congressional Budget Office estimates, implementing these increased loan limits could result in approximately $10 billion in additional FHA loan guarantees through December 31, 2008. As FHA-insured mortgages may become the loan of choice for many homebuyers and refinancing borrowers in the coming months, we have attached a recent Client Alert in which we summarize the FHA single-family program. As FHA loans gain popularity, lenders should be careful to ensure compliance with HUD’s lender and loan eligibility criteria and to keep apprised of new FHA requirements. If you are interested in learning more about the essentials of FHA lending, please let us know