The Federal Housing Administration announced recently that they are increasing the FHA loan limits for 2018. FHA loans are originated by FHA-approved lenders and are insured by the FHA as part of the public mandate to assist Americans in purchasing a home. The 2018 increase affects nearly every area of the United States, more than 3,000 counties nationwide. This is the largest scope of increases in recent years.
In high-cost areas, limits on FHA loans will increase up to $679,650. This is an increase of nearly +7% from last year. The 2017 loan limit was $636,150. The floor will also increase in 2018, rising from $275,665 up to $294,515. The increase is on par with the rise of home values over the last calendar year.
Let’s examine more on how the FHA loan program works and how these loan limits are set.
The FHA loan program is primarily designed to help homebuyers that cannot afford a traditional 20% down payment. The FHA program is growing in popularity due to the rise of rental costs and student loan debt. This makes it difficult for borrowers to save when they would otherwise be a perfect candidate for entry into the housing market.
The down payment can be as low as 3.5% of the value of the home. For instance, the down payment on a $150,000 home would total $5,250. In addition, the entirety of the down payment can be received as a gift or grant. This makes FHA loans very popular among first-time homebuyers.
Another part of the public mandate for the Federal Housing Administration is that their mortgages offer loan accessibility to borrowers that have lower credit scores. Borrowers with a credit score between 500 to 579 are required to pay 10% down instead of the 3.5% down payment.
FHA loans offset the requirement for a full down payment with a mortgage insurance premium (MIP). MIP is paid monthly or annually and comes as an extra fee as insurance against default.
How Lending Limits are Set
The National Housing Act requires that the FHA set single family loan limits to 115% of median home values. This was amended by the Housing and Economic Recovery Act of 2008. These are subject to floor and ceiling limits. Median home values are calculated annually down to the Metropolitan Statistical Area and county-level.
The intent of the loan limits is to make the FHA lending program adjust to the current housing environment. As prices go up, loan limits need to increase as well to provide sufficient lending to American homebuyers.
As the housing market has steadily recovered since 2008, home prices have been appreciating nationally. This improvement can be seen in the trend of loan limit increases by the Federal Housing Administration. For instance, in 2016 the FHA increased loan limits in just 188 counties. The following year in 2017, this number increased to 2,948 counties.
The trend has continued for 2018 with an increase in 3,011 counties.
Pacific Union Financial
Pacific Union Financial, LLC is a full-service mortgage lender providing originations and loan servicing across the United States. A privately held direct lender with Fannie Mae, Freddie Mac, and Ginnie Mae approval, we originate loans through our Retail, Wholesale, and Correspondent channels. Let us know how we can help you expand your business.