You could say that FHA mortgages will have lower loan limits for 2014 but that's not quite the whole story. A better explanation is that the FHA will no longer insure mortgages in the upper brackets, thus clearing the field for private-sector lenders. Let me explain: The FHA now has a variety of basic loan limits, depending on where you live, the number of units you have, and whether you're getting a "forward" or "reverse" mortgage. For 2014 the FHA loan limits for the basic 203(b) program and a one-unit property look like this:
- If located in a "low-cost" area: $271,050.
- If located in a "high-cost" area: $625,500.
- If located in Alaska, Hawaii, Guam & Virgin Islands: $938,250.
The maximum insurable loan amount for a reverse mortgage, what HUD calls home equity conversion mortgages (HECMs), remains $625,500.
Down Is Up
In 2013 you could get an FHA-insured loan for as much as $729,250 in a high-cost area, however for financing above $625,500 you needed at least five percent down instead of just 3.5 percent. The purpose of huge FHA loans -- those above $625,500 -- was to help home sales rebound in California, New York, Massachusetts and other places with an expensive housing stock. The idea, however, ran into claims of "mission creep," that somehow the FHA had deserted its historic mission to serve first-time buyers and the middle class.
Bigger Is Smaller
Actually, though, the FHA has always insured big loans. According to Gary Thomas, the 2013 president of the National Association Of Realtors, "a common misconception exists that the FHA mortgage insurance program was originally intended to only benefit low-income borrowers who could not afford a large down payment on a new home. While the original upper limit of $16,000 for a home loan may seem exceptionally small today, in 1930, the national median home value was $4,778. Only 3.2 percent of homes were valued between $15,000 and $20,000. The majority of homes were valued between $2,000 and $7,500, with the largest number between $3,000 and $5,000." In other words, the FHA loan limit back in the 1930s was roughly three times greater than the typical home price, a trend which continues. In October, for example, NAR reported that they typical existing home sold for $199,500 and at $625,500 the new FHA loan limit will again be about three times larger than the price of an average home. Even with big FHA loans out of the picture borrowers will have no trouble financing such mortgages. Traditionally, jumbo borrowers have paid a premium to get larger loans but at the start of December there was so much jumbo financing available that rates for such mortgages were actually lower than the rates for conventional financing, according to the Mortgage Bankers Association. Plainly, if you need a jumbo mortgage, now is a very good time to consider such financing. As Lewis Carroll said in Alice in Wonderland, the FHA decision to dump big loans means it has lost its muchness. Such mortgages account for far-less than 1 percent of FHA loan volume and at this point simply represent a political hassle for HUD, one that produces little financial advantage. So, bye-bye big FHA loans.