Higher loan limits give FHA a new role
WASHINGTON — After a year characterized by grumpy partisan gridlock, Congress came up with a Thanksgiving compromise that could change the mortgage choices of buyers and refinancers in more than 660 markets across the country: It raised maximum loan limits for the Federal Housing Administration while leaving loan ceilings untouched for Fannie Mae and Freddie Mac.
In effect, this may make FHA the go-to financing option for borrowers needing loans up to $729,750 — with down payments as low as 3.5 percent — in high-cost areas of California, metropolitan Washington D.C., New York, New Jersey and scattered counties in other states including Massachusetts, Florida and North Carolina. Fannie Mae- and Freddie Mac-eligible loans in those areas, meanwhile, stay capped at $625,500. Equally important, the new plan raises the FHA ceilings in hundreds of more moderate-priced markets.
The new loan ceilings in hundreds of markets are at the core of the compromise: They raise the maximum FHA loan amount in all areas of the country to 125 percent of the local median home-sale price, while leaving Fannie Mae's and Freddie Mac's limit at 115 percent of median.
What will this mean for buyers from now through the end of 2013, when the compromise expires? "There's no doubt this will drive more business to FHA," said David H. Stevens, former FHA commissioner and current president and CEO of the Mortgage Bankers Association. Annie Austin, a loan officer with Cobalt Mortgage in Bellevue, Wash., said: "With (Fannie and Freddie) limited to $506,000 (locally), FHA is going to become the darling of the industry again" at $567,500. Bob Walters, chief economist of Quicken Loans, one of the largest national lenders, said "the increased loan limits will benefit many consumers — especially those looking to borrow larger amounts but (who) are in a credit situation where Fannie Mae and Freddie Mac loans are not available or optimal."
The switch to FHA could entail some pain, however. Tim Kepler, a loan officer with Land Home Financial in Danville, Calif., noted that the agency raised its upfront mortgage insurance premiums from 0.5 percent of the loan amount to 1.15 percent earlier this year. This "will increase (applicants') closing costs over a (Fannie or Freddie) loan." The premium can be financed, but can add substantially to the costs of high-balance mortgages — more than $500 a month on a $700,000 loan, according to Brian Chappelle, head of Washington, D.C., consulting firm Potomac Partners.
Bottom line for you as a shopper: Take a hard, close look at FHA with a local loan officer, in light of the rule changes. Pencil out the costs, down-payment requirements, and more generous standards on credit. FHA may be your best option. But then again, the higher fees just might change your mind.
Kenneth R. Harney can be reached at email@example.com.