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New Caps on FHA Loans: What It Means for 2019 Lending

As of January 1, 2019, the caps on Federal Housing Administration (FHA) loans will be rising across much of the United States. The climb is driven by the increase in the Federal Housing Finance Agency (FHFA) conventional mortgage loan limit for the new year, which is in turn spurred by climbing median home prices in many places throughout the country.

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Caps Are Rising

For low-cost areas, the mortgage limits for the new year are set at 65% of the national conforming limit for a single-unit property, which is $484,350. The FHA mortgage cap is thus $314,827, an increase from $294,515 in 2018. (The low-cost area limit is also referred to as the “floor.”)

In high-cost areas of the country, the FHA loan cap will rise to $726,525 from $679,650. (The high-cost area limit is referred to as the “ceiling.”)

“High-cost areas” are defined in reference to the FHFA’s loan limit for conventional mortgages that are either owned, guaranteed, or both by the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac).

The floor applies where 115% of the median home price in an area is under the floor limit. According to HUD, regions where the loan limit exceeds the floor are considered high-cost areas. In a high-cost area, the cap on FHA loans is 150% of the national conforming limit, or $726,525.

If a geographical area meets neither the definition of low cost or high cost, the loan caps for FHA loans are generally 115% of the county’s median home price.

The caps and floors are set per county. HUD observed that limits on loans would rise in 3,053 counties across the nation and stay the same in 181 counties. A searchable database can be found here.

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Implications for Mortgage Lending

While the range between $314,827 and $726,525 will give potential homebuyers a number of choices in many areas, it is not likely to do so in areas of the U.S. that are extremely high priced, such as San Francisco or New York City.

As the FHA points out, though, its mandate is to help low- to moderate-income homebuyers purchase a home. The new caps are likely to do this.

However, steadily rising home prices throughout the nation are one factor that may compress mortgage originations across the board, especially in areas where potential homeowners have modest incomes. The more expensive homes become, the larger the slice of the pie taken from consumer incomes, which may be already stretched thin by other consumer debt, which is rising steadily as well. Of course, climbing interest rates also increase housing costs for consumers.

New tax laws which have nearly doubled the standard deduction are also a factor in the mortgage lending equation. Traditionally, the ability to deduct mortgage interest and property taxes have been among the financial benefits of homeownership. Some observers believe that the rise in the standard deduction may ultimately make itemized deductions such as interest and taxes less appealing, and thus remove one financial incentive to home ownership. Since 2018 is the first year that President Trump’s new tax law will be in effect, the jury is still out.

It’s also possible that the strong employment picture will make consumers more likely to approach mortgage lenders and counterbalance the other financial trends.

Ultimately, the combination of economic factors may lead to mortgage originations falling, rising, or staying constant as the year unfolds.