Maximum Loan Limits As Set By FHA

Starting in January, the Federal Housing Administration (FHA) lowered its maximum loan limits in most housing markets, with the aim of forcing buyers at the higher end to turn to private sources. Each area in the country has a limit tied to its median home price and roughly 650 counties in the US are affected by the lower limits.

Historically, the FHA's mission has been to help those with limited resources to buy a home. The agency does not make mortgages itself, but guarantees loans made by other lenders. Its loans require down payments as low as 3.5 percent and the credit standards are not as stringent as conventional loans, making them the go-to loans for most first-time homebuyers.

Since the mortgage meltdown several years ago, the FHA attempted to fill the void created by private lenders leaving the risky market. Loan limits were raised by the Economic Stimulus Act of 2008 to make mortgage credit available during a time when private lending options were severely limited. With few private lenders willing to take on the risk of low-down payment loans, the FHA's share of mortgages has grown to one-third of all home loans. By guaranteeing fewer loans, taxpayers will not be on the hook for as much money.

As private capital returns to the market, lower loan limits will enable the FHA to concentrate on those borrowers that are still under-served. It will also help the FHA get back on solid financial footing. The agency backed a large portion of the loans made in the first years of the economic downturn, many of which soured as well, resulting in major losses.

At the very least, as FHA loans become less attractive to borrowers, it gives private lenders a chance to step up and provide some competitive options to government-backed loans.