Home prices have risen steadily over the last year or so, in most U.S. cities. In some counties, the current median home value is significantly higher than FHA loan limits within the same county. This makes it harder for home buyers to find a suitable property that falls within the maximum size limits. And it begs the question: Will the FHA loan limits be increased in 2017, to keep pace with rising home values?
We put this question to the Department of Housing and Urban Development (HUD), which manages the Federal Housing Administration’s loan program. So far, they have not given us an answer. That may be because it’s just too early to say. Traditionally, HUD will announce FHA loan limits in December, for the following year.
In December 2015, for example, they announced the revised FHA loan limits for 2016. They kept them the same for most counties in U.S., but increased them for 188 counties where home prices had risen significantly in the previous year.
If history is any indication, there’s a good chance FHA loan limits will increase in 2017, at least within select counties where home prices rose sharply in 2016.
What Are FHA Loan Limits?
FHA loans are insured by the federal government, under the management of the Federal Housing Administration. The actual funding comes from a mortgage lender in the private sector, just like any other type of loan. The difference here is that the lender receives some level of insurance from the government, to cover their losses in the event of borrower default.
The FHA loan program offers some unique benefits to home buyers. The 3.5% down payment option is one of the biggest benefits. This is what lures a lot of home buyers to the program. But there are limits to how much you can borrow under this program. Or, more accurately, there are limits to how much the Federal Housing Administration will ensure. These FHA loan limits vary by county and are based on median home prices.
According to HUD:
“Each year, FHA recalculates its loan limits based on 115 % of the median house price in the area. For counties, or equivalent, located in Metropolitan Statistical Areas (MSAs) the limit for all areas in the MSA is calculated based on the highest cost county.”
FHA loan limits range from $271,050 in the more affordable real estate markets, up to $625,500 in “high-cost areas.”
Rising Home Prices Could Justify an Increase in 2017
Median home prices in some U.S. counties are now well above FHA loan limits. In fact, the list of cities where median prices exceed FHA limits continues to grow. This is a direct result of rising home values.
For example, the median home price in Alameda County is around $730,000 (according to Zillow, as of July 2016). But the FHA loan limit for that county is $625,500, the so-called “ceiling” for government-insured loans. In expensive markets like this, there’s a good chance HUD will increase FHA loan limits in 2017.
But they probably won’t raise caps across the board. That’s because in some counties, FHA loan limits are still well above median home prices.
For example, the current median home price in Cook County, Illinois is approximately $200,000, according to Trulia and Zillow. The current (2016) FHA loan limit for Cook County is $365,700, well above the median house price. So we probably won’t see FHA loan limits increase in this market. Instead, the current limits will likely carry over into 2017.
But in those higher-priced housing markets, where home prices have risen more significantly over the last year, we might see higher loan limits for 2017.
Bottom line: We expect to see something of a mixed bag next year, in terms of FHA loan limits. HUD might preserve the status quo in many counties across the country, and simply rollover the current limits into 2017. There might also be a short list of high priced housing markets that get higher loan limits for 2017. We will know more in December, since that’s traditionally when HUD makes their announcements for the next year. This article will be updated when new information becomes available