The U.S. housing market continues to limp along. About a quarter of homeowners are underwater on their mortgage loans, foreclosure filings continue to drag down local housing markets and many borrowers are unable to refinance or sell their homes to improve their standard of living. Now, on top of everything else, the amount people can borrow with a mortgage backed by the government has dropped.

Mortgage borrowing capped

As of October 1. 2011, the maximum amount you can borrow with a government-backed loan is capped at $625,500. Previously, borrowers could get a mortgage for as much as $729,750 in some high-priced housing markets. The amount you can actually borrow depends upon where you live; the Federal Housing Administration has a tool that can help you find the conforming loan limit for your area.

The change in the conforming loan limits is likely to make it tougher for some borrowers in more expensive housing markets to get approved for mortgages. They may need to put down larger down payments or look for less expensive homes.

Getting a mortgage

Should you be worried about this change? Probably not, unless you live in a high-cost housing market. But even if you do, it is likely that housing values have fallen in your area, making homes more affordable than a few years back when the limit was increased. In this economy it makes sense to scale back plans for a home purchase. Getting into too big of a mortgage loan could put your financial future in jeopardy if you have to stretch your finances to make the monthly payments.

If you still want to finance a home over the conforming loan limit, you’ll probably need to apply for a jumbo mortgage. Getting a jumbo loan means you’ll pay a higher rate of interest and go under even tougher scrutiny to get approved.

Shop around for the best deal

Take time to investigate your options before applying for a mortgage. Whether you are buying or refinancing, it’s important to compare mortgage quotes to find right deal for your situation. Even if you are concerned about how the change in the FHA loan limit may affect your ability to obtain a loan, don’t assume that you won’t get approved by a mortgage lender. Shop around to get information from several lenders to help make the decision to get a loan.

Depending on where you live, currently FHA will allow you to finance up to $729,000 with just 3.5% down? This product was part of the legislation passed by congress and chances are that it won’t be around forever. It was a special program that was created by HUD and it could go away at any time.

So if you are shopping for a house in a market where FHA jumbo loans are allowed, be sure to ask your loan officer if this is an option that is available for you. Many people that I talk to are finding that the price declines in areas like California, Arizona, Nevada and Florida for homes over $500,000 have been much steeper than those homes that are priced under $250,000.

That million dollar home in 2006? Chances are that it is now selling for $500,000 and can qualify for a FHA jumbo loan.

Basic FHA jumbo loan guidelines include:

• Up to $729,000 financed. (based on the county loan limits published by HUD)
• 660 FICO score required.
• 3.5% down payment.
• 30 year fixed rates around 5%

So if you are thinking of selling your existing home and moving up, the FHA jumbo loan product may fit your overall financing objectives.  FHA jumbo loans are done by FHA lenders who do regular FHA loans and generally take about the same amount of time to get closed as an FHA loan.  Some lenders require 2 appraisals for FHA jumbo loans, but not all lenders do.

So FHA loans are popular because they have a low down payment, relatively flexible underwriting guidelines and low fixed rates — among a few other reasons. When people ask me what the advantages are to an FHA loan, here are just a few of the things that I talk about as to why an FHA loan may be right for them:

• FHA requires a 3.5% down payment as opposed to at least a 5% conventional loan down payment
• The closing costs and down payment can be a gift from a relative (or employer)
• There are higher debt to income ratios allowed when qualifying
• A higher loan to value ratio is allowed with FHA loans
• FHA still allows a cash-out refinance of up to 85% loan to value
• The UFMIP can be financed into the loan
• There is never a prepay penalty on an FHA loan
• The seller may contribute up to 6% on a FHA loan

There may be a few other advantages when getting an FHA loan – but these are some of the simple ones that seem to come up in conversation all the time when speaking with borrowers about them.

Oh, and now we are all clear on the FHA insurance thing — and who exactly it benefits: the lender.

This wouldn’t be the first time that FHA has raised the insurance premiums for an FHA loan, but it usually seems like in the past they have raised the UFMIP (up front mortgage insurance premium) and not the monthly MI (mortgage insurance). Nonetheless, the proposed raise in FHA insurance could make getting an FHA loan a lot more expensive in the near future if the bill makes it through the full House of Representatives and Congress.

Should the insurance hike pass, what it means to the homeowners trying to get a loan is that it will be harder to qualify because of the increased costs. Higher insurance costs will increase the monthly payment and result in the ability of a borrower to finance a home because the increased debt ratio calculation. A higher mortgage payment while making the same money each month will result in it being more difficult to qualify for a mortgage.

There are other important changes to the FHA program in the bill as well such as FHA holding lenders more accountable for bad loans as well as increasing the authority of FHA to pull the approval of FHA approved lenders. While these items are also important to the FHA borrower, they just don’t seem (to me at least) to have as big of an impact on the ability of an FHA borrower to get a loan as higher insurance fees.

Because in today’s world – more than ever before – people are trying to stretch their dollars as far as they can.

Some lenders have a rule in place that they will not lend you money for an FHA loan if the home you are buying has been bought (usually by an investor) within the last 90 days – who is then turning around and selling the home to you.

And not to confuse the issue too much — but even though there are some lenders who won’t loan you money for an FHA loan if the property has been bought in the last 90 days already… some lenders will loan you money for an FHA loan in this situation.

As long as you aren’t buying it for more than 120% of what the previous owner paid for it.

Oh, and now to really confuse you — some lenders will loan you money for an FHA loan even if the home has been bought within the last 90 days and you are paying more than 120% of what the previous owner paid for it.

Which leads me to the question: is there really such a thing as a FHA 90 day flip rule?

I guess it depends who you ask.

And if one lender tells you that there is such a thing and that they can’t loan you money because of the rule, don’t give up! Just go find another lender who will loan you money on an FHA loan in this situation.