FHA Mortgages:  Try not to be one of the 40,000-50,000!

Above photo – courtesy of Matthew Staver/Bloomberg via Getty Images

(Photo by Justin Sullivan/Getty Images)








Home ownership is the key asset for most homeowners.  To help fund the purchase of a home, FHA (Federal Housing Administration) has been a vital mortgage program to help define middle-class status.

The mortgage crisis of 2008 forced many leaders to shut down.  However, it was the FHA program which became a safety zone for borrowers needing legitimate financing featuring low down payment.  It also allows lenders who were on the fringe to use the program to help stabilize their business.


Recently FHA made some changes to the program.  It has been the projected approximately 40,000-50,000 borrower per year will be affected and some in that population are in jeopardy in being able to ultimately qualify for a mortgage.  Due to current mortgage data there has been an increase in borrowers opting for cash-out.  Additionally, debt-to income levels have seen an increase and overall credit scores have declined.


“We have continued to endorse loans with more and more credit risk,” said FHA’s Chief Risk Officer Keith Becker. “We felt that it was appropriate to take some steps to mitigate the risks we’re seeing.”


Those factors are just three highlighted by FHA now requiring those who may be considered less creditworthy but still in the ballpark of qualifying for a mortgage will no longer be able to use automated underwriting.  Instead, due to their marginal circumstance, their loan package must now be manually underwritten.  For lenders going back to the traditional process will be costlier to them due to the time required to conduct the underwriting.  Due to the manual process, lenders may not be as eager to approve the loan fearful in the event of default their decision could be challenged and result in buy-backs or other negative impacts, which could affect their business.


“it’s likely that many of the loans flagged for manual underwriting won’t end up passing muster.”  Chief Risk Officer Keith Becker, FHA

So, while owning a home is still considering “the American Dream” the key to making it a reality is making sure your credit package is not part of the projected population.  Of course, for some they very well may be willing to take a chance and go through the manual underwriting gauntlet as some will be successful.

Conforming Loan Limits increased

above photo Mel Watt, director of the Federal Housing Finance Agency (FHFA), from left, Jerome Powell, chairman of the U.S. Federal Reserve, Steven Mnuchin, U.S. Treasury secretary, and Jay Clayton, chairman of the Securities and Exchange Commission (SEC), listen during a Financial Stability Oversight Council (FSOC) meeting at the U.S. Treasury in Washington, D.C., U.S., on Tuesday, Oct. 16, 2018. Powell said at the meeting he is worried about a spillover from hard Brexit, but stocks and Treasuries showed little reaction. Photographer: Andrew Harrer/Bloomberg via Getty Images


Today, the Federal Housing Finance Agency (FHFA) announced conforming loan limits would increase from $453,100 to $484,350.  For higher cost areas (see map below) the new limit will be $726,525.  FHFA was created as the umbrella agency for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Fannie Mae Headquarters, Washington, DC (Photo by Alex Wong/Getty Images)
Freddie Mac Headquarters, McLean, VA (Photo credit should read PAUL J. RICHARDS/AFP/Getty Images)

They purchase home loans from a network of lenders across the nation.  The lenders originate the loans from consumers who are seeking to finance their home purchase or to refinance their existing mortgage.  The lenders also work with mortgage brokers, credit unions and other organizations who have direct contact with consumers.

Once the loans are funded, they are packaged and sent to respective investors (i.e., Fannie Mae and Freddie Mac) and sold as securities, which are backed or collateralized from the property.


The Impact

Nationally the average loan amount is $229,000.  The new guidelines take effect for mortgages that originate starting January 1, 2019.  The increase will help those who see home prices continue to rise.

Conforming loans are those where the loan amount is $484,350 OR LESS.  Any loan amount in excess of that loan is defined as a “Non-Conforming” loan.  For borrowers the impact is typically ½ point or 50 basis points on the interest rate.


As an example based on current limits

Loan Amount Rate Payment Mo. Difference
$453,100.00 4.81% $1,816.00 -$188.00
$453,101.00 5.31% $2,004.00

The bottom line difference could be approximately $190 each month.  So, while the monthly payment is crucial, the move also provides those with higher loan amounts an additional $31,250 to deal higher prices, while being able to obtain more affordable interest rates.