FHA and HUD Explain Higher Loan Limits in 2021
Those with home loans in the new year get higher loan guaranty limits to work with than in 2020. Higher FHA loan limits each year is not guaranteed but we have seen increasing limits in the last couple of years. The FHA has gone on the record to explain the hows and whys.
Why FHA Loan Limits Went Higher in Both 2020 And 2021
FHA is required by federal law (known as the National Housing Act as amended by the Housing and Economic Recovery Act of 2008) to set Single Family forward loan limits at 115 percent of area median house prices. This is subject to a floor and a ceiling on the limits, and the FHA / HUD calculate forward mortgage limits by Metropolitan Statistical Area and county (see below).
That explains the authorization to do so. But what about the motivation for higher FHA loan limits in 2021?
According to Assistant Secretary for Housing and Federal Housing Commissioner Dana Wade, “FHA has seen consistent increases in loan limits during the past few years" and is likely due to what the FHA describes as "robust increases in median housing prices" which required changes to FHA’s floor and ceiling limits, "which are tied to the Federal Housing Finance Agency (FHFA)’s increase in the conventional mortgage loan limit for 2021".
What does that mean for the average consumer? One benefit--the maximum loan limits for FHA forward mortgages goes up in 2021 for 3,108 counties. According to an FHA press release, "In 125 counties, FHA’s loan limits will remain unchanged."
How FHA Adjusts the Limits
How do these alterations work? "By statute, the median home price for a Metropolitan Statistical Area (MSA) is based on the county within the MSA having the highest median price” says a press release at HUD.gov, which adds that the agency has long held a practice to use the highest median price point” for any year since the enactment of the Housing and Economic Recovery Act."
What that means in 2021? In high-cost areas of the country, FHA’s loan limit ceiling goes higher: $822,375 from $765,600.
The national conforming loan limit for 2021 is $548,250. The FHA 2021 minimum national loan limit “floor” of $356,362 is set at 65 percent of the national conforming loan limit. This applies to areas in the United States where 115 percent of the median home price is less than the “floor” limit.
Houses for sale in any area where the loan limit exceeds this ”floor”, are being sold in what the federal government considers a high-cost area.
Federal law requires FHA to set its maximum loan limit “ceiling” for high-cost areas at $356,362--150 percent of the national conforming loan limit. Potential borrowers need to remember that the higher limits apply for home loans with FHA case numbers issued in 2021; if you have an FHA case number already the FHA loan limits established for 2020 apply to your transaction.
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