In a move that will help thousands more families become homeowners each year, the Department of Housing and Urban Development has begun insuring larger home mortgages to keep pace with rising home prices.

HUD began insuring home mortgage loans on Jan. 1 of up to $115,200 in communities where housing costs are relatively low and loans ranging up to $208,800 in communities where housing costs are higher.

This is the second increase in the loan limits since October, when the GOP-controlled Congress voted to raise limits. The mortgage insurance is provided by the Federal Housing Administration (FHA), a division of HUD.

"This is good news for many hard-working families across our country, because it will give them the opportunity to become homeowners," said HUD Secretary Andrew Cuomo. "Since 1934, FHA mortgages have transformed homeownership from a distant dream into a sweet reality for more than 27 million American families. Higher FHA loan limits will create a higher homeownership rate that will benefit families, create jobs and strengthen our nation's economy."

Before the October increases took effect, the loan limits for FHA mortgage insurance ranged from just $86,317 to $170,362 -- below the cost of most homes in many communities.

In October, FHA mortgage loan limits jumped to a range of $109,032 in low-cost areas to $197,621 in high-cost areas under the legislation passed by Congress. The FHA loan limits were raised on Jan. 1 based on an increase in the size of home mortgages available for purchase by Freddie Mac, a federally chartered corporation that buys and packages mortgages.

HUD is sending letters to thousands of mortgage lenders and mortgage brokers around the country to make them aware that the higher FHA loan limits can help their customers.

"We want everyone in the mortgage industry and every potential homebuyer to know that FHA is back in business, operating more efficiently and effectively, and doing more than ever to increase homeownership," Cuomo said.

HUD has had problems with its image lately. Just over a month ago, the inspector-general for the Department of Housing and Urban Development warned that HUD was losing $1 million every day by failing to dispose of the vacant properties in its inventory.

In a matter of weeks, according to published reports in the Washington press, the General Accounting Office is expected to follow suit by classifying HUD as an agency at "high risk" to waste, fraud and abuse. If so, it will be the fourth year in a row that HUD has been cited for such costly carelessness.

Cuomo said the higher FHA loan limits are expected to help drive the nation's homeownership rate beyond its current record high of 66.8 percent of all households. Today 69.1 million American families own their homes - more than at any time in American history.

FHA insured more than 1 million home mortgages in 1998.

The higher FHA loan limits will not cost the government any money, because the FHA Insurance Fund is supported by premiums paid by borrowers who receive FHA insurance.

The higher loan limits will particularly benefit first-time homebuyers and minority homebuyers. Eighty percent of FHA-insured home loans go to first-time homebuyers. FHA insures about 40 percent of all home mortgages to African American and Hispanic homebuyers.

The higher loan limits will also apply to FHA's 203(k) Rehabilitation Program, which offers homebuyers an FHA-insured mortgage to finance both the costs of purchasing and repairing homes in older urban areas.

The increase in FHA mortgage loan limits will also benefit senior citizens. Under the increase, many senior citizens can now qualify for larger FHA-insured reverse mortgages - enabling some individual homeowners to borrow tens of thousands of dollars in additional funds.

Reverse mortgages allow homeowners age 62 and older to borrow thousands of dollars against the value of their homes without selling the homes. Homeowners can collect a lump-sum payment, monthly payments, or tap into a line of credit to get cash when needed. No repayment is necessary as long as a homeowner lives in a home with a reverse mortgage. The reverse mortgage is repaid, with interest, when a homeowner sells the home or dies.

By law, HUD cannot insure a reverse mortgage above the local FHA loan limit. Therefore, an increase in the loan limit can greatly increase the value of a reverse mortgage.

FHA does not make mortgage loans directly, but rather insures loans made by private lenders to homebuyers. FHA insurance guarantees the lender timely payment of principal and interest, in the event the homebuyer defaults on the loan.

Because FHA mortgage insurance protects lenders from losses, it has enabled millions of Americans who would otherwise be locked out of the mortgage market and homeownership to qualify for mortgages.

FHA-insured loans benefit homebuyers in these ways:

FHA downpayments of 3 percent are lower than the minimum that many lenders require for non-FHA mortgages. High downpayments are a major roadblock to homeownership.

FHA's requirements for homebuyer credit ratings are more flexible than those set by many lenders for non-FHA borrowers.

FHA permits homebuyers to use gifts from family members and non-profit groups to make their entire downpayment, while conventional loans generally require homebuyers to come up with a portion of the downpayment from their own funds.

FHA permits a borrower to carry more debt than a private mortgage insurer typically allows.

Published: January 7, 1999

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