November 17th, 2011 3:33 PM by Richard T. Cirelli
Update on Higher Loan Limits:
While still no definitive news on increasing the conforming loan limits back to $729,750 in certain high-priced markets, it appears that Congress is now ready to vote on raising the limit on FHA loans, but not for loans sold to Fannie Mae and Freddie Mac. The bill is set to be voted on November 18th. This is puzzling for those of us in the industry. Read on….
FHA loans are insured by the Federal Government. The program was originally created to help lower-income borrowers by insuring lenders against default by the borrower. FHA loans require a minimum down payment of only 3.5% of the purchase price of a home. By contrast, “conventional” loans require higher down payments and lenders are protected against default by “Private Mortgage Insurance” (PMI) companies rather than the Government. Our government seized control of the two providers of Conventional loans a few years ago when these enterprises went broke. With a Conventional loan, the minimum down payment is 5% or 10% depending on the loan amount and the PMI is required whenever the buyer is putting down less than 20% of the purchase price. Therefore, the Government has exposure only to 80% of the value or purchase price of the home. With an FHA loan, the Government is on the hook up to 96.5% of the value or purchase price.
All three agencies – Fannie Mae, Freddie Mac and the FHA (Federal Housing Administration) are losing billions of dollars each year. And now the Government is considering increasing the limit on the riskier FHA loans rather than the less-risky Conventional loans. Go figure!
The Impact of the Lower Fannie, Freddie & FHA limits:
The temporary approved limits were reduced on October 1st from $729,750 to $625,500 on single-family home loans. We have only one month of data to compare but according to DataQuick Information Systems, Orange County home sales fell 2.5% in October. And, 50% of the drop occurred in the $600,000 and above price range. This strongly indicates that the reduction in loan limits is further hurting the already depressed housing market.
More About FHA Loans:
If FHA loans are going to become more popular, we should learn more about them. Here’s what you need to know:
· FHA loans now account for about one-third of all loans in the U.S. That figure is likely to be lower in Orange County and southern California in general, but growing.
· FHA loans require a minimum of only 3.5% of the purchase price as a down payment. And, that down payment can be borrowed from a relative.
· FHA lending guidelines are a little more relaxed than Conventional loans, sometimes allowing higher Debt-to-Income ratios and lower credit scores.
· There are two parts to the FHA mortgage Insurance Premium (MIP). First there is an upfront MIP of 1.00%. This gets added to the base loan amount. For example, if the base loan amount is $500,000, the Loan Amount with MIP becomes $505,000. Secondly, there is the monthly MIP calculated at 1.15% of the loan amount. On the same loan of $500,000, the monthly premium is $479.17. The cost of the MIP is reduced with higher down payments.
· FHA loans are for Owner-Occupied 1-4 family properties only. The loan limits are higher for 2, 3, & 4 unit properties.
· Appraisals tend to be a little stricter if the appraiser notes any items that need repair.
· Lending on condominiums is more restrictive than on Conventional loans.
· Interest rates are about the same as they are for Conventional loans
The FHA Advantage:
FHA loans may have the advantage whenever the down payment is less than 5% on a loan amount up to $417,000 and less than 10% if the loan amount is over. FHA loans may also provide an interest rate advantage for borrowers with lower credit scores. And if the bill passes as expected, there will be a definite advantage on loan amounts between $625,500 and $729,750 in the higher-priced counties.