Loan Modification

Are FHA Loan Limits Unfair?

By Peter G. Miller

Reporter Jamie Smith Hopkins with the Baltimore Sun tells an interesting story. A reader writes and says he wanted to refinance a home in Howard County, just south of Baltimore. To the FHA, however, Howard County is part of greater Baltimore and thus has a single-family FHA loan limit or $560,000. Alas, the reader wants $590,000 to refinance existing first and second loans.

You can see where this is going. The reader wants more mortgage than the FHA is willing to insure for his county. However, there are two other points to be made. First, the reader says he is about a mile of Montgomery County, MD where the loan limit is $729,750. Second, both Montgomery County and Howard County are very rich places.

How rich?

The Huffington Post reports that among 3,100 counties nationwide, Montgomery County ranks twelfth in terms of income — its residents have a median household income of $93,895. That’s impressive but get this: Howard County ranks fifth with a median household income of $101,867.

So is the FHA unfair with its loan limit boundaries?

FHA Loans For First-Time Borrowers

The FHA loan program has always been skewed to serve first-time buyers and those who are not buying the biggest home in town. As FHA Commissioner David H. Smith explains, “we know the critical role first-time homebuyers are playing in the market, including purchasing REO and vacant properties, helping stabilize home prices and communities alike. More than three-quarters of FHA?s purchase-loan borrowers in 2009 were first-time homebuyers, and nearly half of all first-time buyers in the housing market in the second half of last year used FHA loans.”

Given this tilt you can expect the FHA to have a conservative bend when it comes to loan sizes. That said, why have county limits at all?

The FHA used to have two sets of loan limits: one for the lower 48 states and a limit that was 50 percent higher for Alaska, Hawaii, Guam and the Virgin Islands. The current loan limit system is a model of complexity. We ought to go back to the old system of loan limits.

Ms. Hopkins’ reader raises a key point: Real estate values are localized and individualized. In my county you can find $100,000 condos and $20 million estates. An expensive home can be down the street from a more modest property. That we only have one set of FHA loan limits per county in such a diverse marketplace is a needless complication when there’s a very easy way to determine if a property should receive FHA mortgage financing: Get an FHA appraisal for the specific property and see if it meets FHA guidelines and national FHA loan limits.

Will the system change? I have no idea. I could never figure out why a system that worked so well was modified in the first place.

Full post as published by FHA Mortgage Guide on June 07, 2010 (boomark / email).