In a welcome reversal to loan limit reductions of $625,500 that were imposed on FHA, high balance, and super conforming loans on October 1, 2011, the FHA increased its high balance limits in mid-November to the former threshold of $729,750. The increased FHA limit should be effective throughout 2012, however both Fannie Mae and Freddie Mac’s high balance and super conforming products currently remain fixed to the lower amount.
The FHA’s higher limit of $729,750 affords borrowers superb financing, especially long-term, fixed pricing with 30-year mortgages currently around 4.0%. In contrast, the conventional high balance and super conforming loans, which cap out at $625,500, have rates of .125% to .25% higher. And, as soon as conventional financing exceeds this limit, loans fall into the category of “non-conforming, jumbo” and see their rates increases again by .125% to .625%.
Another distinction separating conforming and non-conforming jumbo financing from the FHA product is that the former generally require a 20% down payment. Anything less than this requires private mortgage insurance and this, when available, is offered on a relatively limited basis with far more stringent preconditions. (Usually, mortgage insurance will cap out at 85% of the purchase price, borrowers need credit scores of at least 720, and debt-to-income ratios are less forgiving.) For non-conforming, jumbo loans, mortgage insurance or financing in excess of 80% is generally not an option and lenders often require extremely low debt-to-income ratios, higher credit scores, and significant cash reserves.
With FHA financing, borrowers need only 3.5% toward the down payment and no additional reserves are required. Mortgage insurance is mandated for all FHA loans along with impounds (monthly payment of property taxes and hazard insurance), but credit scores as low as 620 are accepted through most lending channels. For borrowers with challenged credit or limited reserves, the FHA’s loan product is a natural choice. With just 3.5% down against the maximum loan amount of $729,750, a qualified borrower can support a purchase price of around $756,000. FHA loans are also more accommodating of gift money or of bringing in a co-signer to qualify. And they also show greater flexibility with respect to seller or lender-paid credits to cover closing costs.
It is also worth noting that the FHA product can support well-heeled borrowers whose only limitation is the 20% down payment required by conventional financing. A borrower with a down payment just shy of 19% could purchase a property for $900,000 and enjoy long-term financing at the lowest rates available. Although some conventional jumbo loan programs offer supplemental financing to 85% (thereby circumventing the need for mortgage insurance) these are tough to qualify for and many borrowers with limited down payment funds would do well to consider FHA financing.