In general, housing experts are thrilled that the real estate market has continued its recovery. For some consumers though, this success comes at a price. Rising home costs are pricing properties in some markets out of reach of FHA mortgages.
An FHA loan is a key way into home ownership for many buyers with limited credit histories. However, there are restrictions on how much you can borrow, and as home prices continue to climb, more and more markets are rising above those limits.
While a pricey or fast-rising housing market can push homes out of range of FHA loans, there are still options for consumers looking to buy a home in such markets.
FHA Loan Limits Don't Always Keep Up
The FHA manages a federally-backed mortgage insurance program that gives lenders the confidence to lend to borrowers who don't have an extensive credit history. In order to contain the risk of this program, the FHA places limits on how much any one loan can represent. To some extent these limits are adjusted to local real estate values, but there is also a national cap that applies regardless of where you live.
While those limits are adjusted by the FHA over time, it is not uncommon for prices in some markets to grow past those limits, for two reasons:
- Bumping up against the ceiling. The national maximum for an FHA loan is currently $625,500. The FHA recalculates this limit periodically, but those adjustments are made based on national conditions. Naturally, real estate conditions vary greatly from one area to another, with some markets vastly more expensive than national norms. For example, the average residence in Manhattan now costs $1.87 million, according to appraisal firm Miller Samuel. While the average is pulled up by some very expensive properties, even the median home price in Manhattan is $980,000. This means that most residential property in Manhattan is more than $350,000 above the FHA loan limits. Other pricey markets like San Francisco are also finding an increasing number of properties soaring well beyond the FHA limit.
- Getting left behind by fast-moving markets. Markets that are generally below the national FHA mortgage limit have local limits based on 115 percent of the median home price for that market. Those limits are reset annually, but in hot markets where prices are moving quickly, a growing number of properties can zoom past the FHA limit before it next resets.
Options for Would-be Home Buyers
Running afoul of FHA loan limits has made buying a home more challenging, but there are still options for would-be buyers:
- Use a bigger down payment to bring the loan value down. Significantly, those FHA limits are based on the size of the loan, not the total value of the property. Saving up for a bigger down payment can help bring the loan value needed for a more expensive home down below the FHA limit. A bigger down payment will also reduce your mortgage insurance premiums, and may also earn you a more attractive interest rate from a lender.
- Get your credit history in shape to qualify for a conventional loan. If you simply can't get your loan amount down within FHA limits, then your best path may be a conventional mortgage. To qualify, you will need a more established credit history. Get in a habit of using credit regularly and paying it off on time. Also, be aware that a stable job history can be a factor in getting approved for a conventional loan.
- Check surrounding areas. Real estate prices vary greatly, so if things are a bit pricey in your neighborhood of choice, look for alternatives that are still within commuting distance of your workplace. Broadening your search might turn up prices that are more in line with the FHA limit, or it may take you into neighboring counties where that limit is higher than in your current one.
Rising prices are good for the housing market, unless you are just trying to get into that market for the first time. For would-be buyers in pricey markets, understanding the above options may be essential to finding a way into home ownership.