FHA Loan limits’ increase potential impact on the Charlottesville market

In response to an inquiry thanks to my handy-dandy “contact me” widget (look to the right!) —

I asked Matt Hodges (archived: 2016), a Charlottesville broker with whom I work frequently, to write the following article. Knowing whom to ask is as valuable as knowing the answer yourself. I’m a big fan of “I don’t know, but I’ll find out.”

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The Economic Stimulus Plan passed last week by Congress (H.R. 5140) included provisions to increase the limits of loans purchased by Freddie Mac, Fannie Mae (archived: 2010) and FHA Loans (archived: 2012).  The increases for Freddie and Fannie will not affect the current limit of $417,000 in our area.  (Even more here) FHA will experience an increase county-by-county, Then, Housing and Urban Development (HUD) will have 30 days to provide the official loan limits for lenders to use.

Will it help?

Using very rough calculations from sources at HUD, CAAR and lenders I work with, the increases could range from the current limit in the Charlottesville MSA of $323,000 up to $387,500 in Charlottesville and Nelson.  More likely, it seems, the overall MSA, including the City, Albemarle, Greene, Fluvanna and Nelson will see an increase to something less than $340,000, unless lenders specifically apply for increases above the MSA limit.  In data available at CAAR, including Louisa, the median price came in below $277,000.  Using the calculation of 125% of the median sales price (from the legislation), that would calculate to $346,000.  Excluding Louisa (which had a lower median sales price last year since it is part of the Richmond MSA), the amount increases slightly.  Is this a windfall for local buyers and borrowers?  Hardly.  Will this increase perhaps invigorate loan officers to “give FHA another shot”?  Maybe.

How could this help?

With tighter credit standards from both Freddie and Fannie and the lenders’ own portfolio products, borrowers may need the credit standards that FHA allows.  Further, with low down payments, FHA is more attractive based on the mortgage insurance costs than either 95% or 100% conventional loans. (Talk to your tax professional regarding tax deductibility of mortgage insurance up to $109,000 of income). Further, FHA only requires a 3% “contribution.”  This can be in down payment or a combination of down payment and closing costs.  This could additionally help in markets that have been marked at “declining” by Fannie or Freddie, the appraiser, or each lender’s individual lists.  FHA does not place additional restrictions, such as larger down payment in declining markets.

Buyers: listen to your loan officer about how FHA could help you.  Realtors: realize that FHA isn’t as onerous as it once was.  Let’s see what happens in 30 days.

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A good definition of “declining market” –

To begin, there is no standard definition of a declining market. In general, base on the tracking of home prices in a certain geographic location (state, Metropolitan Statistical Area, ZIP code, etc.), a declining market is one in which home prices are currently declining. VSS has adopted the following definition of “Over Supply” for real estate markets.

    Over Supply: the situation where there is more inventory than there are available buyers when considering prevailing prices and market conditions.

Note that this definition addresses the prices within the market. If prices are stable, an inventory can build to the point where there is an insufficient quantity of buyers willing to purchase the homes. When this situation arises, prices will frequently begin to decline.

Two excellent articles –

FHA: A Siren Who Just Might Break Your Heart by Jillayne Schlicke
Conforming Loan Limit of $650,000, FHA Loan Limit of $729,000 by Brian Brady