In the coming year it's likely that more than 1 million people will buy homes or refinance with loans backed by the Federal Housing Administration. But what's new for 2001 are bigger FHA loans, simplified down payments, and lower up-front costs.

FHA does not make loans, it's actually an insurance program with lenders as the beneficiaries. The way it works is that consumers borrow with little down (or little equity for those who are refinancing). Lenders would not normally make such loans, but they will under the FHA programs because the federal agency insurance the mortgage: If there's a default, Uncle Sam will pay some of all of any lender loss.

Late last year, Fannie Mae and Freddie Mac increased the conventional loan limit to $275,000 for a single family house.

This figure is important because it determines the maximum size of FHA loans. Under the rules governing FHA mortgages, such financing can be no larger than 87 percent of the conventional loan limit. The result is that when the conventional loan limit goes up, the amount available with FHA backing also increases.

For 2001, the maximum FHA loan limit for a single-family home in "high cost" areas is $239,250. For a duplex the limit is $306,196, up to $370,098 is available for a triplex, and as much as $459,969 is can be insured under the FHA program for properties with four units. In Alaska, Guam, Hawaii, and the Virgin Islands the loan limits can equal 150 percent of the loan amounts available elsewhere. (There is a movement in Washington to include areas with expensive housing such as California and New York in the 150-percent preference category.)

Not all communities are "high-cost" areas however. To find your local FHA limit, go to the FHA Mortgage Limits home page to see what's available in your community.

FHA has a complex downpayment formula on the books. The formula is so complex that virtually everyone in real estate prefers the straight 3 percent down "temporary" replacement program that began in 1998 but was scheduled to end in September, 2000. Now, however, the simplified program has been extended another 27 months, good news because 3-percent down is understandable and requires less money up front for many borrowers then the alternative and complex FHA formula.

The FHA program is an insurance plan that requires borrowers to pay both an up-front fee and a monthly fee. As of January 1st, the up-front fee has been reduced from 2.25 percent of the loan amount to 1.5 percent. You'll save $750 in cash at closing if you borrow $100,000 under the new fee schedule when compared with FHA borrowers who settled before the New Year.

The monthly insurance fee remains equal to .5 percent of the outstanding loan balance. However, under a new FHA policy, the fee will end for FHA borrowers once the original loan balance is reduced by 22 percent. The same cancellation plan has been available to those who finance with private mortgage insurance (PMI) since July 29, 1999, and many conventional lenders have even more liberal cancellation practices.

Published: January 8, 2001

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