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How Is the FHA Streamlining Procedures?

Few homebuyers anymore put a full 20 percent down on their purchase, since there other alternatives. The Federal Housing Administration offers one of the most popular low-down-payment mortgages with the FHA loan. While these loans once had strict guidelines for qualification, which impacted their accessibility, the FHA has recently streamlined its procedures.

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New FHA Loan Limits for 2019

The biggest change with FHA this year is that FHA loan limits were increased. As home prices across the U.S. have continued to increase, federal housing officials have confirmed that the limits for FHA and VA loans will go up as well.

As of January 1, most areas of the country received a boost in FHA loan limits. For example, the limits for single-family property now range from $314,827 to $726,525. There are a few "exception" areas where construction costs are high, such as Guam, Hawaii, Alaska, and the Virgin Islands. The loan limits in these areas have been boosted to $1,089,787 this year.

These limits are based on median home values and vary by county. For example, more expensive areas like San Francisco and New York City have the highest limits. The lower limits will coincide with more affordable markets.

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More Leeway for Lenders

The FHA approval process can be grueling, and many lenders have been hesitant to offer the loans because a single error in an application could result in penalties. The FHA wants to encourage more home ownership and has announced that it's going to stop this practice. In other words, lenders who submit loan applications that have a minor mistake, but that would otherwise be approved, will no longer face a backlash from the agency.

Now that the FHA has softened its relationship with lenders, this could have an additional effect. The FHA has always had somewhat lenient lending standards, but many banks "overlay" these with their own guidelines that are more strict. For example, the FHA might allow a standard DTI of 31% while a lender requires that it be 28% or below.

Lenders historically created these overlays so that they could reduce the chances that they would be subject to any penalties by the FHA. While there will still be overlays, it's possible that some lenders will loosen the reins enough for more borrowers to get mortgage approvals in the coming year.

No Reduction in Mortgage Insurance Premiums

There was formerly a policy in place that would have reduced mortgage insurance premiums for FHA loans, saving borrowers an average of $500 per year. But President Donald Trump canceled this program shortly after taking office. While this was a benefit that was expected by some borrowers and something that many industry groups promoted, it's not likely something we will see in 2019.

Before the relaxed procedures went into effect, FHA loans accounted for roughly 20 percent of all mortgage applications. With these new changes that make these loans more buy-friendly, it's expected that lenders will begin approving even more of these loans as the spring home-buying season gets underway.