Beginning October 1, 2011, FHA single-family loan limits will drop significantly, from $729,750 to $625,500. This may not seem like a big deal, especially if you can never even dream of purchasing a house nearing the one-million-dollar mark, but there are some things all prospective buyers should be aware of.
Once federal loan limits are reduced, certain counties will see drops in their individual loan limits. In some areas of Middle Tennessee, for example, one county’s loan limit will drop from $432,500 to $393,000. In order to purchase a home over $393,000, home buyers will be forced to come up with bigger down payments.
The reason is that any mortgage over the federal cap will be considered a “jumbo loan”. For Tennessee home buyers, that could mean putting down 30% of the purchase price just to qualify. A quick look at any mortgage calculator will tell you, that’s a hefty chunk of change. Anyone buying a home over the federal cap will also see an increase in interest rates on jumbo loans, which will greatly impact upscale markets.
While the repercussions of this change may not be felt as strongly in Tennessee, New Yorkers and other metropolitan residents will have a more difficult time finding financing. In Manhattan alone, one-bedroom properties sell for $750,000 to $1 million, which is well above the federal cap. Those home buyers not able to close before September 30th will be forced to save even more money for down payments because they didn’t meet the deadline for financing with a bigger mortgage limit.
Knowing how long it can take to close on a property in New York City, most lenders have already set and passed their own cutoff date of August 15th for home buyers to take out the $729,750 mortgage limit.
Anyone taking out a $700,000 mortgage in New York City will have already been subjected to the jumbo mortgage rate terms and conditions, which cost borrowers several hundred dollars a month extra. That’s money nobody saw coming when making estimates in a mortgage calculator.
Of course this means the mortgage cap can affect home sellers as well. Potential buyers that could afford a home in September may be forced to back out of the deal come October, leaving more homes on the market. One association estimates that the federal cap will affect as many as 5 million homes across the nation. Housing demand will decrease and home prices will have no option but to endure forced reductions.
But the new limit affects more than just immediate buyers and sellers. There will be more stringent requirements to be met in order to qualify, although FHA loans may make room for lower credit scores. For the most part, the FHA single-family loan limits should affect affluent communities the most due to the sheer size of the cap, which is actually still higher than they were before the last increase from $417,000 in 2008.
With the housing market still waning, however, those larger median home prices in areas such as New York, California and Washington D.C. are going to take a hard hit and this isn’t exactly the time to force the housing market to stall.