2014 FHA Loan Limits Bring Lower Caps for Borrowers

Summary: Federal housing officials announced the 2014 FHA loan limits last month. The maximum loan size is being lowered from $729,750 to $625,500. This change took effect on January 1, 2014 and will extend through the end of the year, after which it will be reviewed and possibly adjusted again.

At the end of every year, the Department of Housing and Urban Development (HUD) publishes revised loan limits for the popular FHA loan program. The loan limits for 2014 were published on December 6, 2013, with the issuance of Mortgagee Letter 2013-43. HUD has lowered the maximum FHA loan size for a one-unit home to $625,500, a reduction of more than $100,000.

Latest Step to Reduce FHA’s Footprint in Mortgage Market

This is HUD’s latest step toward reducing the government’s footprint within the mortgage market. FHA officials plan to continue backing out of the market, as private capital steps forward. According to FHA commissioner Carol Galante: “Implementing lower loan limits is an important and appropriate step as private capital returns to portions of the [mortgage] market.”

The FHA’s share of the mortgage market surged in the years following the housing crisis. This was largely the result of stricter lending standards imposed by lenders. Borrowers who were turned down for conventional financing flocked to the FHA program as a last resort. As a result, the agency’s market share soared from 4.5% in 2006 to nearly 30% in 2009.

Over the past year or so, HUD officials have also increased mortgage insurance premiums and tightened some of the qualification requirements for FHA loans. But the most popular aspect of this program, the 3.5% minimum down payment, remains intact.

Lower Loan Limits in 2014: ‘Ceiling’ Dropped to $625,500

FHA loan limits vary by location. At the end of 2013, there was a “ceiling” of $729,750 in some of the most expensive housing markets, like New York and San Francisco. Going forward, that ceiling will be lowered to $625,500. The lower limits apply to all loans with a case number assigned on or after January 1, 2014.

2014 FHA loan limits
2014 FHA loan limits. Source: HUD Mortgagee Letter 2013-43.

Exceptions: FHA loans can exceed $625,500 in a handful of areas, to account for higher construction costs. These areas include Alaska, Hawaii, Guam, and the Virgin Islands. Construction materials often have to be shipped to these areas, resulting in higher building costs and home prices. Additionally, the 2014 limits shown above do not apply to FHA streamline refinance or government-backed reverse mortgages (HECM). Those two programs have their own guidelines and limits. The table above applies to “regular” FHA loans used for home purchases.

This change will mostly affect borrowers in higher-end housing markets. But that’s a fairly large chunk of the market. It is estimated that borrowers in 650 counties across the U.S. could be impacted by the lower cap on FHA loan limits introduced in January 2014. These are areas where home prices are well above the national average, including much of California.

As a result of this change, the FHA’s maximum borrowing amount will be in line with¬†conforming loan limits in the U.S. A conforming loan is one that is eligible for purchase by either Fannie Mae or Freddie Mac. The current limit for conforming loans is $417,000 in much of the country, and up to $625,500 in those high-end markets. Anything above this is considered to be a “jumbo” mortgage.

The 2014 FHA limits vary by county and are based on median home values for each county. Many counties in New York, California, Hawaii, and around the Washington, D.C. metro area are considered higher-priced markets, so the $625,500 “ceiling” applies in these areas. For the rest of the country, the limits will fall somewhere between $271,050 and $625,500, depending on local home values.

View a list of counties that meet the $625,500 cap (PDF)

In addition to lowering the ceiling for loan limits, HUD officials have increased the annual mortgage insurance premium (MIP) assigned to FHA-insured mortgages. They’ve also revised MIP rules so that most borrowers will have to pay premiums for the life of the loan, up to 30 years. Additionally, there are now stricter requirements for borrowers with credit scores below 620 and debt-to-income ratios above 43%. These and other program changes are designed to reduce the agency’s exposure while bolstering their capital reserves.

Notes and Disclaimers: This article explains the FHA loan limits for 2014 and is based on information disseminated by the Department of Housing and Urban Development (HUD), specifically through HUD Mortgagee Letter 2013-43. Federal housing officials make changes and revisions to this program on a regular basis. As a result, portions of this article may become outdated / inaccurate over time. To view current FHA limits for your area, please visit https://entp.hud.gov/idapp/html/hicostlook.cfm.