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Current Reforms of FHA Loans

The American Homeownership Act of 1852, also known as FHA Reform or FHA Modernization, was expanded and approved the U.S. House Financial Services Committee on May 3, 2007. This expansion will bring the FHA more prospective buyers and allows more low to moderate-income families to obtain their own home.

Major Highlights of the Legislation:

An Increase for FHA Mortgage Limits:

Increase the limit for lower cost areas from 48% to 65% of the government sponsored enterprises (GSE) conforming loan limit, permitting the FHA to insure newly constructed homes.
Increase the limit for higher cost areas from 87% to 100% of the conforming limit with individual local limits set at the median price of a home in each area.
Borrowers in high cost housing markets who don't qualify for prime mortgages have no option other than high cost loans because of the FHA's current mortgage limits.

Down Payment:

Eliminates the FHA's 3% minimum cash investment requirement and down payment calculation
Provides FHA borrowers a range of options to control the amount of their down payment and mortgage payment based on their immediate and long-term goals.

Loan Term:

Increases the maximum loan term from 30 to 40 years. The longer loan term will decrease monthly payments yet build homeowner equity through a fully amortized loan.

Mortgage Insurance Premium:

Eliminates the 2.25% upfront and .55% annual premium caps allowing the FHA to raise or lower the premium to match the borrower's risk. The FHA borrower gets a market interest rate loan; the risk is mitigated through the premium. "High cost loans" offset risk in the interest rate, sometimes 3% to 8% above market. For example, a 3% FHA upfront premium for a $100,000 mortgage is $19 per month. A 3% interest rate increase (6.5% to 9.5%) for the same mortgage is $156 per month. The difference of $137 would allow the use of $21,700 more towards the purchase of a house. The annual FHA premium charge is eliminated after 5 years and 22% property equity.


Revises the definition of "mortgage" to insure condominiums as a single family unit rather than a multifamily project. The change will align the FHA to the industry and streamline processing, potentially reducing condominium costs.

Reverse Mortgages:

Eliminates the FHA cap on the number of loans that can be insured.
Sets a national loan limit at the GSE conforming rate so that all seniors have equal access to t heir equity regardless of where they live
Permit seniors to purchase a home and get a HECM in one transaction, so that seniors can easily move to more suitable housing. Currently borrowers must complete their home purchase transaction and HECM separately, incurring additional costs.

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