FHA Raises Limits on Conforming Mortgages

The Federal Housing Administration (FHA) runs several programs that rely on FHA loan insurance to protect lenders from defaults. These initiatives promote home ownership for American families. Now that allowable loan amounts have been increased, approximately a quarter of a million more buyers should reap the benefits in 2008.

The FHA assists qualified Americans in buying homes, by helping them purchase with unusually low down payments. These FHA loans allow people to buy homes with a down payment as small as 3 percent, without prepayment penalties. For many consumers, that can mean the difference between renting and owning. The FHA also offers mortgages for people who want to refinance, which is a popular strategy this year for those trying to get away from high-interest adjustable-rate mortgages.

Attractive to investors

In order to convince investors to fund these loans-which are riskier, due to lower down payment equity-the FHA insures them. In case the buyer fails to repay the mortgage, this insurance coverage helps to defray the cost of the investor's losses.

Unlike other programs geared solely toward lower income households, these FHA loans have no income limits. Your credit needs to be decent, and the allowable ratio of borrower debt to income is rather conservative.

Raising mortgage limits

The biggest hitch has been that the maximum amount of FHA conforming mortgages was capped at a level that prevented purchases of more expensive homes. With housing price inflation making it increasingly hard to find moderately priced properties, many buyers had few FHA mortgage options when they went shopping for a new property.

But according to a recent FHA press release announcing higher loan limits, 250,000 additional families could be eligible this year to purchase or refinance with an FHA-insured mortgage. The Economic Stimulus Act of 2008 will allow the FHA to temporarily increase its loan limits and insure larger mortgages in high cost areas of the country.

"The stimulus is providing immediate relief to homeowners," said HUD Secretary Alphonso Jackson at a Greater Las Vegas Association of Realtors keynote speech. "It raises the Federal Housing Administration's loan limits, enabling more families to qualify for a safe, affordable FHA mortgage. This is important. Families in high-cost states have been priced out of FHA-backed loans. This has created a vacuum, filled by exotic subprime loans. Families with home loans up to $729,750 will now qualify for an FHA loan, depending on where they live."

The maximum amount will only be applicable to extremely high-cost metropolitan areas, such as New York and San Francisco, while moderately priced cities like Houston and Tallahassee will enjoy new limits rising to slightly above $270,000. Previously, FHA loan limits in the highest markets topped out at $362,790, a figure that's seriously outdated. The changes are scheduled to last until December 31, 2008, unless government officials extend them.