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    New FHA Loan Limits – What Affect Will They Have?

    There’s a potential housing industry shift about to occur…and not too many people seem to be aware of it.

    FHA Loans, which gained popularity as market values receded and interest rates followed, are about to get a makeover.On October 1st, the loan limits (how much you can borrow when financing) are decreasing. For single unit properties (condos, townhomes, single family homes) the most a borrower can finance will go from $410,000 to $367,500. That’s a roughly 10 percent drop. Does that mean home prices will fall another 10% with this move?

    Under the old guidelines, a borrower putting down 3.5 % (FHA minimum), could purchase up to $425,000. With the new guidelines, the max purchase price adjusts to $380,000.

    The interesting part here is that FHA loans have largely been used by 2 groups recently: first time buyers who may not have 5% or more to put down for a conventional loan, or who have lower credit scores than conventional mortgages will allow (FHA’s minimum is 620). And trade-up buyers who have lost substantial equity in their homes and are struggling to piece together the down payment on their new house.

    Undoubtedly these 2 groups make up a large portion of today’s buyers. First timers have to enter the market to allow those sellers to “trade up” to larger homes. The sellers of these “trade-up” homes then in turn purchase larger homes or downsize to smaller homes, and so on and so forth. It’s a natural progression that is potentially in danger of slowing.

    I’ll be keeping my eyes on how this plays out come October….