Congress Raises Ceiling on FHA Loans

First-time home buyers just got a shot in the arm from legislation passed by Congress that expands the FHA mortgage loan program. Under the bill, the Federal Housing Administration can insure larger loans, up to $197,621 in 36 major metropolitan regions that qualify as "high-cost" for real estate. But don't fall in love with an FHA-insured loan without knowing the drawbacks in the program, says Kenneth Harney in The Washington Post.

The higher loan limits are good news for first-time home buyers all over the country. In the high-priced places such as San Diego, Los Angeles, Connecticut, and Washington, DC, FHA loans were not a viable option for some home buyers because home prices frequently exceeded the old $170,000 limit. More first-time home buyers will probably take advantage of the new $197,621 loan ceiling to get the lower down payment and favorable qualification terms available from an FHA-insured loan. Home buyers in lower- cost markets will have access to bigger FHA loans, too, as large as $109,032--up from the previous $86,317 limit.

Does that mean you should use the FHA program? With down payments as low as three percent, and more generous allowances for previous debt, it's definitely worth considering. But you need to know what you're getting into. While FHA-backed loans have certain advantages over conventional loans, home buyers need to look out for occasional scams by unscrupulous people that prey on the federal government's largest mortgage program.

With the exception of VA loans, there's no question that FHA financing offers the lowest up-front costs of any loan available to the first-time home buyer. Under the right circumstances, almost the entire purchase cost can be financed. At a minimum, ask if you can roll insurance premiums and closing costs into the loan.

In addition, you may find it much easier to qualify for an FHA- backed loan, especially if you have a higher debt load. Conventional loans usually require that mortgage debt not exceed 25 to 28 percent of your total income--total household debt typically cannot exceed 33 to 38 percent of income. But debt limits are higher under FHA rules. Your mortgage debt can reach 29 percent of income. Total household debt, including car loan, credit cards, and student loans, can reach 41 percent of your income. That means FHA underwriting guidelines are generous enough to accommodate younger, first-time home buyers early in their careers.

Unfortunately, unscrupulous real estate agents, appraisers, lenders, and inspectors have colluded to defraud the FHA program and unsuspecting home buyers. As a result, people have been lured into financing and purchasing defective homes. For example, an appraiser chosen by a local lender gave one couple's home in Pennsylvania a glowing report. A HUD investigation later found an unstable foundation, malfunctioning sewage system, electrical code violations, and many other problems which should have been identified by the appraiser. The lesson here is simple: always, always get a thorough, professional home inspection and don't let the real estate agent or lender select the home inspection company for you.