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Upcoming changes to FHA loans that prospective buyers need to know

Wednesday, September 7, 2011

Unless Congress extends the expiration deadline, Federal Housing Administration (FHA) loan limits will drop significantly beginning October 1, resulting in changes that will affect prospective borrowers and the state's housing market. Congress raised the loan limit amount in response to the housing crisis to help spur the home buying market. If the loan limit drops on October 1, many California homebuyers seeking larger mortgages will have to apply for conventional loans or jumbo loans, which may be subject to higher interest rates and down payments.

FHA loans offer borrowers very competitive rates and terms, and they only require a 3.5 percent down payment. Allowable debt ratios are higher than the typical debt-ratio limits imposed for conventional loans. In addition, there are no income limit qualifications, so more people can qualify for them.

Here are four things prospective buyers should know now if the loan limits are reduced on October 1:

1. Lower loan limits. The conforming loan limit determines the maximum mortgage amount that FHA, Fannie Mae and Freddie Mac can buy or guarantee. If a buyer wants to stay under the current loan limits, it may be beneficial for them to purchase now and close by September 30.

2. Drops by county. Under the new FHA loan limits, some counties will see significant drops in their loan limits. Monterey County will experience the largest drop of $246,750, San Diego County a $151,250 drop, Sonoma County a $141,550 reduction, while Santa Clara County will experience a $104, 250 drop, as will San Mateo, Santa Cruz, Orange and Los Angeles counties.

3. Jumbo loans. The current FHA loan limit is $729,750. After October 1, that limit may drop to $625,500. Mortgage loans higher than that amount will be considered non-conforming jumbo loans, which typically have rates that are 0.875 percent to 1.5 percent higher than conforming rates, depending on the loan product, and require higher down payments.

4. More stringent requirements. FHA loan requirements may allow for lower credit scores. So an applicant with a lower FICO score can still qualify for an FHA loan, even if they can't for a conventional loan. Some borrowers may be able to obtain an FHA loan three years after defaulting or having a loan foreclosed.

Regionally, under the lower FHA loan limit, C.A.R. indicates San Francisco County would be impacted the most, with more than 14 percent of home sales rendered ineligible, followed by Santa Cruz (13.9%), Orange (13.3%), Marin (13.2%), San Mateo and Ventura (both at 12.7%), Santa Clara (12.2%), San Diego (11.9%), Alameda (11.8%), Riverside (11.5%), and Contra Costa (11%) counties.

"The California Association of REALTORS® estimates thousands of California homeowners will face higher down payments, higher mortgage rates, and stricter loan qualification requirements if conforming loan limits are reduced. This would be unfortunate and could impede a housing recovery," said Silicon Valley Association of REALTORS® President Gene Lentz.


The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.

The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.

Variations of this article have appeared in local area newspapers.

For further information, please contact Rose Meily at SILVAR Public Affairs, email , or phone (408) 200-0109.

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