U.S. Department of Housing and Urban Development announced the new Federal Housing Administration (FHA) mortgage loan limits for single-family homes under the Housing and Economic Recovery Act of 2008.

Beginning Jan. 1, FHA will insure single-family home mortgages up to $271,050 in low cost areas and up to a maximum of $625,500 in high cost areas. The February 2008 Stimulus Package temporarily raised the FHA maximum to $729,750 through Dec. 31.

The new $625,500 maximum, however, represents a considerable rise over the $362,790 limit that was in effect before the Stimulus Package.

For several years, FHA's loan levels were below the cost of the average home in communities across the nation. Because of this, families who needed FHA mortgage insurance to qualify to buy a home were effectively locked out of the process. In some cases, borrowers turned to exotic subprime loans.

FHA mortgage insurance makes home financing more available to low-income and first time homebuyers. This is because the mortgage is backed by the full faith and credit of the government, freeing lenders from assuming the risk of default.

Higher FHA loan limits do not cost the government any money because the FHA Insurance Fund is fully supported by premiums paid by borrowers who receive FHA-insured mortgage loans.

The Housing and Economic Recovery Act pegs the national conforming mortgage loan limit to a house price index chosen by the new Federal Housing Finance Agency (FHFA). For 2009, the national conforming limit will remain at the current level of $417,000.

The Act says that the new FHA loan limits will be set at 115% of the median house price in a given area, as determined by HUD, but can not be lower than 65% of the conforming loan limit the national floor. 

The FHA mortgage limit also cannot exceed 150% of the national conforming loan limit (the national ceiling).

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