Congress has extended FHA loan limits in 2009, 2010 and 2011 on an annual basis, but on October 1, 2011, the loan limits for the FHA will decline due to changes set in law. FHA loan limits are set slightly differently than those for Fannie Mae and Freddie Mac. By law, the lowest limit for any county for one-unit homes is $271,050. The ceiling for FHA currently cannot exceed $729,750, but that ceiling is set to decline on October 1, 2011 to $625,500.
For counties that lie between these limits, the mortgage loan limit is equal to the area median house price multiplied by 125% (currently) or 115% (as of October 1, 2011).
According to the limits published by the Federal Housing Administration, 620 of 3143 counties in the United States, or 20% of the total, will see a decrease in the applicable FHA loan limit. Many, but not all, of the affected areas are concentrated along the coasts and other high cost areas such as California. It is also worth noting that every county that will realize a decrease in its applicable GSE loan limits is also among the 620 counties that will face a decline in the FHA loan limit.
We use the American Community Survey (ACS) to demonstrate that these counties include significant concentrations of population and housing, more than the share of the counties affected (one in five) would suggest. In fact, the affected counties contain 44.3 million owner-occupied housing units of the 75.3 million nationwide or 59% of all owner-occupied housing in the U.S.
For counties facing a decline, the average decline in the FHA loan limit is $58,060 or 14% from current levels. For Pinellas and Hillsboro counties there is a $21,450 decline, $157,300 for Manatee and Sarasota counties.
To estimate the range of homes that will be affected by the change, we assume an average 3.5% down payment (the minimum required under present law by the FHA). Using home value data from the American Community Survey (ACS), we interpolate prices by county. With this approach, we estimate the following impacts concerning affected homes:
• Under present law, 8.32 million owner-occupied homes are priced above the existing FHA loan limits
• Under the changes set to take place on October 1, 2011, an additional 3.87 million owner-occupied homes will be put above the limit, bringing the total number of homes that are not eligible for FHA-insured mortgages to 12.2 million.