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FHA sets limits on home mortgages

November 21, 2008 12:36 am

The Federal Housing Administration will back single-family home mortgages up to $625,500 throughout much of the Fredericksburg area next year.

Fredericksburg-area home buyers have increasingly turned to FHA-backed loans this year as conventional bank financing has become harder to get for borrowers without pristine credit or sufficient funds to make large down payments.

In October, for example, 29 percent of the homes sold in the Fredericksburg area were financed with FHA-backed loans, according to Metropolitan Regional Information Systems Inc. That number was in the low single digits during the housing boom.

The limit on FHA-backed loans was $362,790 before it was temporarily raised to $729,750 as part of February's economic stimulus package. The temporary maximum expires Dec. 31; the new $625,500 national ceiling is below the temporary limit but well above the previous level.

The higher limit gives more potential home buyers access to FHA-backed loans, and it also gives more people struggling to make their payments the ability to refinance into the government-insured loan.

"In today's environment where access to credit is being restricted, we need to make mortgage loans readily available to households throughout the country, and especially in high-cost areas," U.S. Department of Housing and Urban Development Secretary Steve Preston said in a prepared statement while announcing the new limits this month.

With FHA-backed loans, the federal government isn't actually lending the money. Rather, it's insuring that the lender will be repaid in event of default. Insurance premiums pay for the program, which involves inspections of the homes being purchased and the credit of the potential borrower.

Effective Jan. 1, borrowers must put 3.5 percent down for an FHA-backed loan. The FHA charges a 1.75 percent upfront mortgage insurance fee, plus an annual fee of about 0.5 percent, which is paid monthly in the mortgage payment.

That means that a homeowner taking out a $250,000 FHA-backed loan would have to pay $8,750 down, as well as $4,375 up-front and $104 a month to insure the mortgage. The monthly insurance premiums end after the borrower has paid off a certain percentage of the loan.

The $625,500 limit is for what the FHA calls "high-cost areas." The FHA backs loans up to $271,050 in "low-cost areas."

Residents of Fauquier, Fredericksburg, Spotsylvania and Stafford all will be eligible for the $625,500 maximum. Loan limits for FHA-backed loans in Orange and Westmoreland counties are $271,050. Limits in other area localities are between those two figures.

HUD's announcement this month pointed out that FHA loan limits were below the cost of an average home for several years. That locked out many families who needed FHA mortgage insurance to qualify, and in some cases those buyers turned to subprime mortgages. Many of those buyers have since gone into foreclosure, which has had a snowball effect that's created many of today's economic problems.

Earlier this month, the U.S. Treasury and the private sector alliance Hope Now announced a new program that will make it easier and faster for at-risk homeowners to modify their mortgages. The "Streamlined Modification Plan" will be implemented by Dec. 15, according to Hope Now. Many large banks have said they're working closely with distressed homeowners.

Still, the Federal Deposit Insurance Corporation and many Congressional Democrats are arguing that more has to be done to directly aid homeowners. President-elect Barack Obama said during an interview on "60 Minutes" Sunday that he will create a program to give direct aid if one is not already in place when he takes office Jan. 20.

Bill Freehling: 540/374-5405
Email: bfreehling@freelancestar.com