Higher FHA loan limit opens market
Higher FHA loan limit opens market

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By Richard Mize

Published: March 7, 2008

Oklahoma home buyers got a $70,900 lift Thursday when the federal government temporarily raised the limit on home loans backed by the Federal Housing Administration.

The aim: To help more people buy and refinance houses.

In Oklahoma, the limit went from $200,150 to $271,050. With the median-price home here costing less than $130,000, the increase opens a big segment of the housing market to borrowers who couldn't reach it before, lenders said.

"It's a wonderful deal. It's going to put more home buyers in the driver's seat,” said Lyne Tracy, a mortgage banker with BOk Mortgage, a department of Bank of Oklahoma. "This year, we're going to see a lot more FHA loans and a lot less conventional.”

The Department of Housing and Urban Development said the new loan limits, part of the federal economic stimulus package, will remain effective through 2008.

FHA-backed loans have more flexible requirements and rates than conventional loans.

"Given the fact that underwriting on conventional loans has gotten so much tighter over the last few months, FHA is a much more affordable loan option for borrowers with credit scores below 680, which is the majority of borrowers,” said Scott Senner, a mortgage consultant with First Commercial Bank.

With the loan limit raised to $271,050, Tracy said, the new-home segment of the market, and neighborhoods with bigger or newer homes desired by homeowners in their first home, could feel the biggest effect.

Since the general credit tightening that followed the national subprime mortgage mess, Oklahoma homeowners with less-than-perfect credit who wanted to move up were stuck, she said, if their desired move-up cost more than $200,150.

Both the less stringent qualifying standards for FHA loans and the raising of the loan limit, gives them room to move and lenders a way to help them, she said.

"This is a 35 percent increase, which is remarkable. This dramatically decreases the gap between FHA and the conventional limits of $417,000,” said Sheryl Eastwood, BOk Mortgage senior vice president.

Borrowers facing increased fees because of increased charges on the secondary mortgage market can access FHA loans that do not carry the higher fees, Eastwood said.

Borrowers with adjustable-rate mortgages and homeowners juggling a first and second mortgage now "may be able to roll both loans into one,” she said.

Senner said the FHA's stance on the giving of down payments also will spur buying.

"FHA only requires a 3 percent cash contribution from the borrower, which can all come from a gift or down payment program, whereas conventional loans require at least 5 percent down, of which all must come from the borrower,” he said.

Co-signers also have easier qualifying for FHA loans, said Mark Harry, vice president for residential lending with the Oklahoma City branch of Wichita, Kan.-based Fidelity Bank.

With FHA loans, the incomes and home occupant and the co-signer — say, a college student and her parents — are pooled for consideration. With conventional loans, the incomes of each are considered separately, and the one with weaker credit weights the lending decision, Harry said.

With conventional loans no longer an option for borrowers with less-than-great credit, Senner said, the FHA loan limit increase will usher people back into the housing market.

"Conventional loans are basically cutting people off with credit scores below 620,” Senner said. "FHA is still a possibility with a score down to 550.”