Decreasing FHA Loan Limits, a Game Changer

Will the decision to decrease FHA loan limits be a game changer?  I believe so as there are 372 active listings within the Austin Multiple Listing Service (MLS) that will be impacted based on their current list price, but you decide after reading further.

If you are on the prowl for a home to purchase in the Central Texas area, are planning to proceed with a Federal Housing Administration (FHA) insured mortgage and your possible purchase price range is above $280,880 - keep on reading!  An upcoming change to the FHA maximum loan limits may or may not affect your ability to purchase the home you have your eyes set on or affect the likelihood of selling if you are attempting to sell your home.

On October 1, 2011, FHA maximum loan limits are set to decrease from $288,750 (or a $299,000 purchase price) to $271,050 (or a $280,880 purchase price).  This change both can affect both buyers and sellers looking to buy or sell real estate in Travis County, Williamson County, Hays County and Bastrop County.

How does it affect you as a buyer?

Currently, a buyer is able to proceed with a FHA loan with financing up to $288,750 (or up to a $299,000 purchase price).  When the change takes place, the loan limit will decrease to $271,050 and will decrease the maximum purchase price to $280,880 to still accommodate a 3.5% down payment FHA loan.  If you had your eyes set on a home priced above $280,880 you now have three options in order to proceed with the purchase.

• Contribute more funds towards the down payment to satisfy the new lower maximum loan limits
• Forgo FHA financing and opt for a Conventional loan (minimum down payment of 5% and loan limits ceiling is $417,000)
• Ask the seller to consider a reduction in the sales price that would still allow you to purchase and still would allow them to sell the property

Don't panic if you are currently under contract to purchase a home, read below and be sure to speak with your mortgage professional to ensure you or your potential buyer is grandfathered.

How does this affect you as a seller?

If your home was valued within the $300,000 price point, your realtor probably advised you to set pricing on or around $300,000 in order to lure both FHA and Conventional mortgage buyers.  Since many buyers opt for FHA financing due to various reasons (lower mortgage insurance monthly amounts, the ability to obtain lower interest rates with lower credit scores, etc), if your property is still being marketed with a price that exceeds the new maximum loan limit, then you may alienate half or more of the potential buyers.  For example, if a buyer was interested in your property priced at $299,000 prior to the loan limit change, they'd be responsible for bringing at least 3.5% of the purchase (or $10,250) to the table for their down payment.  After the change takes effect, the buyer would have to dole out an additional $17,700 just to meet FHA loan guidelines.  Yikes, that's a little over a 9% down payment.  

So, if this buyer doesn't have the additional 5.5% to keep on track to purchase your property now the only option is to proceed with a Conventional loan, providing they have 5% of the purchase price set aside for a down payment.  That's 1.5% more than they had previously accounted for.  Then, there is a possibility the buyer may not qualify for the same interest rate as they had on the FHA loan option based on their current credit score further changing their financing picture.  Plus, the monthly mortgage insurance payment increases, further increasing their monthly obligation.  These changes can quickly create havoc and derail a buyers decision to buy your home or reassess their priorities.

As a seller, put yourself in the buyers shoes and ask yourself these two questions, especially if your home is priced is higher than the allowable maximum limits.  

• As a buyer, are you willing to pay the possible additional up-front and monthly unforseen costs to purchase this particular home?  
• Is it in your best interest to reanalyze the search criteria and locate a home that is priced accordingly to the new loan limits?

If you are a buyer and already have a contract on a home or are a seller and already are under contract with a buyer, don't panic just yet.  There are a few questions you or your agent should ask the mortgage professional.

• Is there a case number assigned?  
• Does the buyer have a Scorecard approval?  If not, when do they expect to have approval?

After speaking with my preferred mortgage professional, buyers whose loan package has been submitted, have a FHA case number assigned and have been issued a Scorecard approval will be grandfathered providing the approval and both case number is issued on or before September 30, 2011.   Those parties who do not have an approval on or before September 30, 2011 will be forced to conform to the new guidelines.  Game changer?  I think so!