Cap on FHA Loans Takes Effect January 1

The cap on FHA loans in relatively low-cost housing markets will remain unchanged at $271,050 in the New Year, but the cap in the priciest markets will drop from $729,750 to $625,500 beginning January 1.

On Friday, the US Federal Housing Administration announced plans to scale back the size of the loans it insures in an attempt to reduce its share in the mortgage market.

FHA loan limits vary by region. This decision will bring it somewhat in line with Fannie Mae and Freddie Mac, which both have a cap of $417,000 in most markets and an upper limit of $625,500.

About 650 counties across the United States will see lower FHA limits in 2014. This change takes place as the higher loan limits established by the Economic Stimulus Act of 2008 expire. This news has been anticipated for some time, although it will only affect less than 1% of current production. According to Per Compass Point, recent data from HUD shows only 0.53% of FHA single family endorsements were for loans exceeding $625,500.

In addition to lowering the high cost market maximum, the formula used to calculate area loan limits between the floor and cap has also changed and will be lowered from 125% of area median value to 115%.

“As the housing market continues its recovery, it is important for FHA to evaluate the role we need to play,” said Carol Galante, FHA Commissioner. “Implementing lower loan limits is an important and appropriate step as private capital returns to portions of the market.”

As Reuters reported, those in favor of lowering limits believe the government should not be offering assistance to borrowers in high-end markets.

Last month, Fannie Mae and Freddie Mac’s regulator stated the $417,000 conforming loan limit would remain in place. This is the ceiling for the two mortgage giants in most markets.

The Federal Housing Finance Agency’s acting director, Edward DeMarco, was considering lowering the limit to take into account dropping home prices in many markets during the housing collapse.

This limit is adjusted upward when housing prices go up, but it has never been adjusted downward. This decision was praised by the National Association of Realtors, who said that lowering the conforming loan limit would “increase costs for consumers and reduce their access to conventional mortgages.”