FHA Loan Limit Increases and Lender Risk

How can lenders navigate increases in the FHA Loan Limit with success?

DENVER; Feb. 2, 2021 - As last year was coming to a close, the Federal Housing Administration (FHA) announced that the FHA Single Family loan limits for 2021 would increase in many areas of the country. While there were some counties (125) where the loan limits will remain the same, the vast majority of counties (3,108) will see increases, with borrowers in high-cost areas seeing the FHA limit increase from $765,600 to $822,375.

Will this increase risk for both the Agency and FHA lenders? Or will this spell more opportunity for growth in 2021?

It’s important to note that FHA did not make its decision to increase its loan limits on a visible increase in earning power for Americans, but rather on the cost of housing across the country. The agency pointed to “robust increases in median housing prices” as the cause of its floor and ceiling limit changes.

The real question is what will this do to the risk profile for the loans the  FHA guarantees? Just a month before HUD increased its loan limits, news broke that FHA loan delinquencies were up to 15.6% by Sept. 30 – its highest rate since at least 1979. The rate peaked during the Great Recession between 14% and 15%.

High-quality loan underwriting always limits risk, but when the property costs more than three quarters of a million dollars, are we still working with the borrowers FHA has traditionally served? The U.S. Department of Housing and Urban Development (HUD) addressed some of these concerns in its press release.

“FHA has seen consistent increases in loan limits during the past few years, putting it in a position to serve a segment of borrowers that may be better-served by the conventional market,”  said Assistant Secretary for Housing and Federal Housing Commissioner Dana Wade in the release. “FHA’s mission is to support low-to-moderate income borrowers, so why does the law permit FHA to insure mortgages up to $822,375? This is a question for Congress and the taxpayers who stand behind FHA to answer.”

HUD noted in its November 13 Annual Report to Congress that there are risks and flaws in current FHA loan limit calculations, but said it could not fully address them without Congressional action.

FHA Loan Limit impact on mortgage lenders

Whether HUD’s FHA program is serving the right borrowers and guaranteeing the financing on the right properties is well above the paygrade of most front-line mortgage originators. Their job is to get Americans into homes and this change will make that easier to do.

There is broad support for HUD’s increases both from lenders and real estate sales companies. This is definitely an opportunity to increase homeownership and transition more consumers from renters to owners. As Bankrate points out (and all originators know): “FHA loans can be helpful for homebuyers with smaller down payments, less-than-excellent FICO scores and a tighter home-buying budget.”

However, because higher loan limits make it possible for these borrowers to get homes pricier than they can reasonably afford, it will be important for mortgage originators to underwrite FHA loans in 2021 carefully and document them fully.

If FHA delinquencies continue to increase, you can count on the agency to engage forensic quality control experts to conduct reviews. An effective process for FHA loan originations and the technology to back that process up will be imperative to protect lenders in the future.

Contact us today to talk to a lending expert at Mortgage Cadence about auditing your current FHA lending process.

By Joe Camerieri, EVP, Client Account Management at Mortgage Cadence

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Mortgage Cadence:
Megan Martin
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megan.c.martin@mortgagecadence.com