Thursday, August 25, 2011

FHA is lowering loan limits: What does it mean for Chicago?

Our money man Steve Dunnett talks FHA loan limits

The loan limit for an FHA single family residence in the Chicago-land area will be lowered on October 1st, 2011 of this year.  The limit is currently $410,000 on a single family home. Many in the real estate and lending community have fought the lower limits but I think the potential repercussions are being overblown (at least for the Chicago market). 

First we need to understand mortgage insurance (MI) and dependence on FHA mortgages. MI is an insurance policy that protects the lender in the case of the borrower’s default. An FHA loan has mortgage insurance that is backed by HUD (government) and a conventional loan (sold to Fannie Mae or Freddie Mac) has mortgage insurance that is provided by for profit companies. When the financial meltdown happened in 2008 many of the private mortgage insurance companies pulled back and restricted loans they would insure. One example is that, almost overnight, most lenders could only lend up to 90% of the sales price on a conventional loan. FHA continued to allow up to 96.5% loans so FHA went from being a small piece of the mortgage market to a major chunk. Thus dependency on FHA loans and higher limits.

Luckily today’s market is not nearly as dependent on FHA and their ability to insure mortgages.. We now have private mortgage insurance options for 97% loan to value mortgages (3% down) for buyers with credit scores over 680 and 95% mortgages (5%) for clients with 620 credit scores. The private money and investors that left the market back in 2008 are now coming back and trying to steal the business back from FHA. This is a good sign for the market, as it shows that the mortgage insurance companies do not expect today’s loans to default, and they don’t want FHA to continue getting all the business.

FHA will continue to be an important part of the mortgage market, and any changes will be felt but I am glad that we are not as dependant on it as much as we were in 2008.

Stephen Dunnett, Loan Officer
NMLS ID: 755940
Wintrust Mortgage

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