Some Housing Markets Are Getting Too Expensive for FHA Loans

FHA loans are one of the most popular mortgage financing products for home buyers these days. They’re especially popular among first-time buyers, who often lack the funds for a large down payment. (FHA allows for a down payment as low as 3.5%.)

But with home prices rising steadily across the country, some housing markets are becoming too expensive for a Federal Housing Administration-insured home loan. In such markets, buyers often have a hard time finding a house that falls within FHA loan limits. This makes the program less viable for borrowers in cities like San Jose, Seattle and Manhattan.

FHA Loan Limits Max Out at $625,500

FHA loans are insured by the federal government. The program is managed by the Department of Housing and Urban Development (HUD). That department is also responsible for establishing loan limits for borrowers. These limits vary by county and are based on home prices in the area.

In 2016, FHA loan limits range from $271,050 to $625,500, depending on location.

But in some U.S. cities, average and median home prices have risen well above the loan limits for the surrounding county. In such areas, borrowers could have a harder time finding a suitable property within the FHA’s lending limits.

Expensive Housing Markets Reduce Loan Options

Take the San Francisco Bay Area for example. A recent blog post by Bay Area-based Bridgepoint Funding noted that the median home price in Alameda County is more than $100,000 above the FHA loan limit for that county.

As the author stated: “home buyers in the county might have a harder time finding a suitable property within FHA limits, when compared to borrowers in neighboring Contra Costa County [where average home prices are lower].”

This is true for an ever-growing list of cities in America, and it’s a direct result of rising home prices. Over the last few years, house values have risen sharply in some parts of the country. And while the median price in most counties is still below FHA loan limits, there are a number of counties where prices have climbed above those limits.

It’s not limited to the notoriously high-priced California housing markets either. In Seattle, Washington, for example, home prices have skyrocketed over the last few years. Zillow reports a 17% jump in the last year alone, with additional gains expected over the next 12 months. As a result, median house values in the Seattle metro area are now well above the FHA loan limits for surrounding King County. The county’s loan limits were increased from $517,500 in 2015 to $540,500 in 2016, in response to rising house values. But the higher limit is still well below median home prices in Seattle.

According to a March 2016 article in The Seattle Times: “Single-family home prices in the city … jumped 24 percent over the year to a median $644,950.” That’s about $100,000 higher than the loan limit for this area. Seattle is now on a growing list of cities where FHA loans are become harder to work with.

This doesn’t mean home buyers in places like Seattle and the Bay Area can’t use FHA loans to purchase a home. It just means they’ll have to cast the net wider to find a property that meets their needs and falls within FHA limits. Or else they’ll have to use a jumbo loan.

Higher Caps Possible in 2017

According to HUD, the Federal Housing Administration loan limits are based on the “median sale price value for each jurisdiction.” In some cases, HUD will increase the limit for a particular county from one year to the next, in response to rapidly rising home values. They did this for 188 counties from 2015 to 2016, while all other counties were unaffected.

There’s a chance they will announce another round of loan limit increases in December 2016, resulting in higher caps for some counties in 2017. This would make the program more appealing to a larger number of home buyers, especially in those areas where house values currently exceed FHA loan limits.

Sorry Manhattan, San Francisco and San Jose … you’ll probably never be FHA-friendly.