FHA increases mortgage limits — a lot

The Federal Housing Administration (FHA) has bumped up loan limits in 2022. These loan limits represent the maximum mortgage amount for an FHA-insured mortgage.  The “ceiling” limit for FHA-insured mortgages vary based on metro, with most high-cost California metros exceeding the national limit.

The maximum size of an FHA-insured loan in California’s major metro areas for 2022 is:

Metro One Unit Two unit Three unit Four unit
Los Angeles $970, 800 $1,243,050 $1,502,475 $1,867,275
San Diego $879, 750 $1,126,250 $1,361,350 $1,691,850
Sacramento $675,050 $864,200 $1,044,600 $1,298,200
Riverside $562,350 $719,900 $870,200 $1,081,450
Fresno $420, 680 $538,650 $651,050 $809,150

The increase in FHA loan limits is fairly steep. For example, 2022’s ceiling for a single unit in Los Angeles is $970,800, up from $822,375 in 2021. This 18% increase is significant, and in-line with home value changes experienced across the state in 2021.

The new FHA-insured mortgage limits are in effect for case numbers assigned on or after the 1st of January, according to Mortgagee Letter 2021-28.

The logistics involved coincide with the FHA’s calculations of median home prices. The limits are set at or between low and high-income areas. The FHA’s loan limits have regular adjustments made as home values shift.

Reconsidering the calculations

The goal of the FHA-insured mortgage program is to help first-time homebuyers qualify for a mortgage with a minimum 3.5% down payment while still receiving competitive mortgage terms. The fact that the government backs these loans gives them that extra flexibility.

However, the idea that a first-time homebuyer may be taking out a nearly-million-dollar mortgage for a single family residence (SFR) in Los Angeles or San Francisco is a bit absurd. And yet, that is the reality where rapidly increasing home prices have landed us in 2022.

For reference, a 3.5% down payment on a million-dollar property is just $35,000. With that little skin in the game, it’s easy to see how any shift in home values will quickly plunge these low-down-payment homebuyers into negative equity.

Distorted home values are prevalent, and therefore what the new FHA loan limits are counting on to be a trend is more like a temporary boost that is quickly running out of steam.

 In 2020-2021, historically low interest rates provided a boost for buyer purchasing power. These low interest rates, along with competition for a dwindling inventory of homes for sale, inflated home prices and sales volume in 2020, gaining speed in 2021.

However, home price increases have begun to slow, particularly in high-priced San Francisco which tends to experience trends ahead of the rest of the state. Expect today’s high home prices to lose all momentum later in 2022, the result of lost support from interest rates, long-term job losses and the elevated level of 90+ day mortgage delinquencies. With the expiration of the foreclosure moratorium now passed and forbearance exits increasing, expect to see forced sales return, bloating inventory, increasing days-on-market and, soon enough, price cuts.

The housing market’s performance in 2022-2023 will depend on the timing and extent of job creation, whether it be through government-sponsored programs now – or jobs returning organically over the next several years. Either way, the recovery of jobs is essential to returning stability to the housing market.

Related article:

Jobs move real estate

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