How the New FHA Loan Limits are Calculated: A Quick Primer

Now that FHA’s loan limits are back to their pre-2008 numbers, getting an FHA mortgage might be quite a bit more difficult in certain areas of the country with above-average real estate prices.  If you’re interested in how this “ceiling” is now calculated, you have to first understand how FHA determines the national loan limit “floor” for FHA loans—a number that is 65 percent of the national conforming loan limit (which is $417,000 for a one unit property for the period January 1, 2014 through December 31, 2014).

The “floor” applies to those areas where 115 percent of the median home price is less than 65 percent of the national conforming loan limit.  The national loan limit also has a ceiling, which is 150 percent of the national conforming loan limit.  In areas where 115 percent of the median home price exceeds 150 percent of the conforming loan limit, the FHA loan limits remain at 150 percent of the conforming loan limit and does not go higher.  This is the ceiling and any loan above this limit will not be approved for that particular area.

The following table illustrates FHA loan limits for low cost and high cost areas.

Property Size	Low-Cost Area “Floor”	High Cost Area “Ceiling”
One unit	$271,050	$625,500
Two units	$347,000	$800,775
Three units	$419,425	$967,950
Four units	$521,250	$1,202,925

Table: Mortgagee Letter 2013-43, Dept. of Housing and Urban Development (Dec. 6, 2013)

If you live in an area affected by these FHA decreases, expect to see a change in consumer loan-related behavior.   While FHA-backed loans offer good rates and terms, there are many other commercial loan products on the market that compete, and aren’t limited by FHA’s “floor” and “ceiling” calculations.  These commercial loan products will likely see a boost in participation in many areas across the country.