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FHA to reduce loan limits

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By Sam Spatter
Friday, Aug. 12, 2011

Michael Georgiana bought his first house, in Uniontown, with an $80,000 government-backed loan from Fifth Third Bank at a 4.5 percent interest rate.

"That was one of the smartest decisions I've made, because I did not have much (money) to use as a down payment," said Georgiana, 25, who is single and works in the Youth Sports program at the Uniontown YMCA.

Some homebuyers may not be as fortunate. The Federal Housing Administration is reducing the loan limit for its loans, and that could affect as many as 10 percent of loans made under the program, lenders say.

Barring Congressional action, the loan limit in the Pittsburgh region of $327,500 will decline to $271,050 on Oct. 1.

Although most buyers will still qualify for an FHA mortgage, some will encounter difficulty, said Mark Steele, president of Howard Hanna Mortgage Service.

Steele said 50 percent of loans his company makes are FHA. The average FHA loan is $143,000, he said, but "10 percent of those loans are in the $300,000 range, and above the pending lower limit, and these would not have qualified."

Andrew Dodd, vice president and regional manager of the mortgage department at FifthThird Bank, said 35 percent of his mortgage volume is FHA and the average loan amount is $142,000. Under the new loan limit, he expects to lose 1 percent to 3 percent of those loans.

Of 5,147 FHA loans issued this year, as of July 31 in the Pittsburgh region, 4,959 of them -- or 96 percent -- would qualify under the $271,300 ceiling, HUD said. The average loan amount as of July 31 was $127,813. In 2010, there were 11,531 loans with an average mortgage of $128,845.

"While the new ceiling will stop some buyers from obtaining an FHA loan, it should not hurt the majority of our buyers, many of whom are first-time buyers," said Lisa Siranovich, president of Sail Mortgage. She said the average FHA mortgage at Sail around $200,000.

Another policy change by the FHA, a minimum credit score for loan applicants of 580 to qualify for a smaller down payment may cause problems for some, lenders said.

Under FHA rules, buyers with credit scores of 580 or higher can qualify for a 3.5 percent down payment. Those with scores below that number -- minimum of 500 -- can obtain an FHA loan but must put down 10 percent. The 580 score went into effect last October. Before, the agency didn't require a credit score and based loan approval on mortgage holders' ability to pay mortgages, said Larmar Wooley, a spokesman with the Department of Housing and Urban Development.

Some mortgage investors, who purchase FHA loans on the secondary market, want credit scores of mortgage holders to be 620, Siranovich said.

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