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What the new FHA mortgage limits mean for you

The changes may affect far more than the amount you can borrow -- so prospective homebuyers should be prepared.

By Credit.com Dec 18, 2013 1:40PM

This post comes from Scott Sheldon at partner site Credit.com.


Credit.com on MSN MoneyThe Federal Housing Administration recently announced a reduction in high-cost area loan limits -- a reduction that comes in accordance with the government’s ongoing effort to retreat from the housing market. Rewind the clock to 2008, when financial markets were significantly depressed, the economy was on the verge of recession -- enter the FHA as the new outlet to support a frail housing sector.


House with coins © Digital Vision/Getty ImagesSince then, unemployment has dropped, job growth, while still bleak, is improving, and real estate is in demand. The FHA has accomplished its goal of helping to boost the housing market. Now the government wants to minimize its exposure to bigger loans.


The FHA loan limit reduction will affect homebuyers in higher-end properties. For example, if you take Sonoma County, Calif., the maximum new FHA loan limit in January will be reduced to $520,950 from $662,500. Homebuyers who once could buy with less capital will now have to invest more cash into the deal or buy less house.


If you're looking to buy a house but haven't yet, here's what to expect in 2014.


1. Your mortgage limits will be lower

Most counties will see the maximum loan limits decrease, on average, by $67,250 beginning January 2014.


2. You'll see jumbo mortgages again

A jumbo mortgage loan typically has tighter qualifying restrictions in terms of credit history and debt ratio requirements than its FHA loan counterpart. For example, a buyer with tarnished credit can use an FHA loan to purchase a home three years out of the short sale or foreclosure or two years after a Chapter 7 bankruptcy. But with many jumbos, the standard seven years will apply in most cases. One exception to this is if you have 30% down, a lender will consider granting a jumbo loan to a borrower two years after they’ve had a short sale.


3. You'll need to get your credit score in order

You'll need at least a 700 credit score to play ball. The best terms will go to those with 740 scores or better. (Before you even start shopping for a home, it's important to know what shape your credit is in. There are many ways to check your credit scores, including Credit.com's Credit Report Card, which is a free tool that shows you your credit scores and an overview of your credit report so you know which aspects of your credit you need to work on to get a higher score.)


4. You might need a 20% down payment

No longer will homebuyers on the higher-end market be able to purchase a home with less than 20% down if the loan is not conforming high balance or FHA. In other words, 20% down is going to be the new normal in most markets for majority buyers. Many investors simply do not allow for mortgage insurance on large scale loan sizes.


5. You'll need more gift money

Brought on by the FHA’s transition out of the mortgage market, and the need for more money down, buyers may have to turn to gift money as a source for the down payment needed to buy the home. But if you do, be ready to have these monies documented and sourced from all the parties.


6. You'll need reserves

Lenders look at reserves as a cushion to make future mortgage payments. While the FHA does not have a reserve requirement, jumbo loans typically do. You’ll need six months of mortgage payments in the bank post-closing escrow.


7. You might have to buy less house

This could end up being the unfortunate fact for many buyers in the market who have substantial income but not enough down payment and/or cash to seal the deal. They may have to scale back the purchase price and loan in order to meet the maximum loan limit criteria in your area.


Keep in mind, the FHA would not reduce the loan limits if there was not financial justification to do so. Home prices have risen in 2013, and future home prices show promise for strong improvement, which can be directly attributed to an improving economy -- as the unemployment rate drops and new job creation increases.


In essence, people buy homes when they're feeling confident about their employment and they have the income necessary and the confidence to do so. While these changes will inevitably affect a percentage of the homebuyers in the market, this is a sign of an overall improving economy which points to good news for home equity and subsequent home sales.


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36Comments
Dec 18, 2013 3:19PM
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The new rules are nothing more than the rules that existed 30 years ago before my fellow Americans decided to play games with their houses so they could buy new cars, eat out and piss away money on their useless children. If you don't have security why should anyone loan you money? We the taxpayers are tired of paying for other's mistakes. These rules keep the failed and the speculators out of the market.
Dec 18, 2013 3:28PM
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I disagree.

We are doing no more than going back to the rules of mortgage that we had for as long as I can remember before the 80's.


20% down

having 3 months of reserve

debt to income of 40%


cant have your cake and eat it.


Cant bitch and bitch and bitch that the banks were giving loans out to those that couldn't pay the loan back.  At the same time bitch that it's to hard to get a loan.


Just saying you can either have loans that you actually have to prove that you make enough and are committed enough to save enough money before committing yourself to 30 years of payments.

or

we go back to what the rules were before the crash and 0 down no back up money and debt to income ratios of 50 plus.


I'm not even passing judgments just saying as a nation it's a decision that has to be made. you cant have it both ways.

Dec 18, 2013 4:09PM
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More government market distortion. More welfare for the wealthy. The maximum FHA loan should be about $150,000. Why is the government involved in any way in the purchase of half million dollar plus houses?  I know they want to prop up prices, mainly to help bankers and realtors. But isn't the FHA supposed to be about making housing affordable? Nothing can make it more affordable than to stop FHA loaning on over-priced houses and letting prices drop to their real value.  
Dec 18, 2013 6:25PM
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The biggest issue I see in that the limit is still too high.  If you are thinking about $500,000 house you are rich and you better be able to pay for it without my tax dollars.  It also does nothing to curb development in environmenally unstable areas (flood plains, coastal regions, wildland-urban interface), so my tax money will still go to support those government backed twits.
Dec 18, 2013 6:56PM
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In other words, buyers will now be held to the standards that they were held to before 2001. Standards that should never have been changed or altered. Liar loans.


When I bought my first home, I jumped through hoops that would shame a trained poodle. That was more than 30-years ago. But when I went to buy my third, and most recent home? Something had changed. There were no hoops. But I held myself to those standards that were once a requirement. And guess what? I've still got my house, and I'm glad to have it, and it's what I can afford--that makes it all the better. It'll be all mine in just 18-months.

Dec 18, 2013 6:12PM
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Maybe the value of homes will go down to where they should be, Maybe then people will not use their home as a piggy bank every time they want the latest and greatest new whatever. 
Dec 19, 2013 12:16AM
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 'Homebuyers who once could buy with less capital will now have to invest more cash into the deal or buy less house.'
Which is the way it should always be if you're over reaching.
Dec 18, 2013 3:33PM
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good   post  ski  bum.... those  were  the  rules  when  I  bought  my  first  house....   than  people   figured  they  didn't  need  to  put   any  money  down  nor   have  any  in  reserve.
Dec 18, 2013 5:56PM
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As an owner of residential rentals this is all great news.   Keeps people renting since they can't qualify to buy.  Just keeps driving those monthly rents higher and higher until people are paying 40% to 50% of their income on rent.  But of course they could never afford to own a home with a stable mortgage payment for 30 years, at low interest rates and depressed real estate values.  No Sirreee, any mortgage payment over 28% of your income and you're disqualified from owning your home.  Just keep paying that rent and buy my homes for me. I'll watch that principal go down each month and take the appreciation in value, too. Thank You DoddFrank, Pelosi, and especially Obama - that community organizer, health insurance and real estate guru.  Leadership at its best.  Of course he didn't become a qualified expert in health insurance and real estate until he became president - which magically makes him qualified to manage those industries by default.   Look at all the jobs coming your way.
Dec 19, 2013 11:37AM
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I had to laugh at the second paragraph that unemployment is down. What?? Hahahah...just this morning, jobless claims were up again and the market is in the tank today. Yesterday the Feds say the economy is going great and showing strength so they will now start to taper their QE and today the housing market shows flat to lower sales and higher unemployment. This is a three ring circus controlled by the banks, government and wall street. Here's a small tip...."Your house is only worth what someone else is willing to pay for it". Nothing more!
Dec 19, 2013 9:36AM
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New rules mean nothing to me! My house will be paid for by the end of 2014! I will never again buy another house with a mortgage. CASH IS KING!

Dec 18, 2013 2:32PM
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most of our working class children will never own a home if this goes the way they would like it to go. how many young working families can get together the cash needed for a down payment and closing costs these days? we are becoming and will remain a nation of renters. this is exactly what big investment money wants. 
Dec 18, 2013 2:53PM
Dec 18, 2013 3:31PM
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ah  yes   2014  will  be   another  bang  up  year  for  reallestate  after   these  rules   kick  in.....  ha   ha    ha.
Dec 18, 2013 5:29PM
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Well, I guess nobody will be buying homes once these rules take effect. 
Dec 18, 2013 6:51PM
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Cool, Speculators are the anti christ of the real-estate market. Hopefully this will keep them in check.
Dec 19, 2013 11:34AM
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These rules should never have been stored in the closet, people ripped off the loan companies and the government allowed it to happen.... most people knew, robbery in plain sight! 
Dec 19, 2013 9:23AM
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You IDIOTS say the stupidest damn things I've ever heard in---my---life! "2008" on the verge of recession"? You media buffoons wear me out!
Dec 19, 2013 1:50AM
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Im  a new army retired soldier this past may. I had the worst credit in the world charge offs debts I had no idea I had it was bad. So jan of this year I paid all my debt and paid my charge offs and mmade all my bills up to date. Now I did save money for a couple of years saved about 29 grand being deployed. I then paid a debt company he ran my credit told me what had to be paid and how to pay so I paide them came back to him and he had all my debt on my report cleaned off because I paid my debts off. I then retired to Utah to buy a home, I went through hell and back used my va loan plus I put 15 grand for closing as well irnest money it was my choice for 90 days my credit was checked my bank was checked my credit card was checked my credit report went from 500  to 840 so I knew I got the new house but it was being builtso I could not close till it was done.. But once it was done I got my home felt great. Now I had to work for this real hard to get my home. So I think if a person wants a home as bad as I did he or she needs to work for it and not handed to them. Now my home is onlt 258 grand but its my home. The people that live around me are hard working people who worked hard to get what they want as well. And it feels good to know that,  I would want some people moving in just because they feel they deserve it or coler or so on. If you want it you yourself needs to work to get it.
Dec 18, 2013 7:58PM
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The story they are not showing are the new government forced lowered requirements for mortgage lending which would have brought back the same problems as the last failures.  Democrats play strange games... check out just who these requirements are for...
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