FHA loan limits will hit hardest in Vegas, Southeast Florida, and Inland Empire

Reducing the maximum size of single-family home mortgages will have a more pronounced effect on markets where home prices haven't recovered to 2008 levels.

December 10, 2013
FHA loan limit

The Federal Housing Administration (FHA) decision to reduce the maximum size on single-family home mortgages that it will guarantee for lenders will have a more pronounced effect on markets where home prices have not recovered to 2008 levels, according to Zelman & Associates, New York.

The FHA announced last week that the maximum allowable loan it will back is dropping to $625,500 from $729,750 in 650 counties as of Jan. 1, 2014. The agency typically backs loans for first-time buyers who can only put as little as 3.5 percent of the purchase price as a down payment. The administration raised the limits during the depths of the 2008 housing crash. Those limits initially were to expire in 2009 but were extended to provide credit to a fragile market.

The real estate consultancy notes that the markets with the largest concentration of mortgage originations above the new threshold are Stockton, Calif., (4.8 percent); Fresno, Calif., (4.2 percent); Phoenix, Ariz., (3.4 percent); the Inland Empire (3.3 percent); and Salt Lake City, (3.2 percent).

“For the majority of potential FHA borrowers affected by the reduction in loan limits, we conservatively expect that it is unlikely that they will be able to easily qualify for an alternative route for financing in today’s stringent underwriting environment,” said Zelman in a statement.

According to Zelman’s analysis of the top 75 markets, 57 percent of mortgage originations were conventional loans, 32 percent were backed by the FHA, and 11 percent were financed by the Department of Veterans Affairs or other government loans. The FHA prescription that the current median sales price in a market be used to calculate the loan limit rather than the previous flexibility of choosing the higher of either the market’s median sales price or the 2008 loan limit will hit hardest in markets with significantly depressed selling prices. The markets with the most severe reductions from 2008 home prices include Salt Lake City, down 59 percent; Stockton, down 38 percent; Madera, Calif., down 36 percent; Sarasota, Fla., down 36 percent; and Modesto, Calif., down 35 percent.

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