October 31 2010 (Jeff Alan)

According to a Mortgagee Letter from the Department of Housing and Urban Development (HUD), a previous FHA loan requirement that the sum of all liens not exceed the maximum geographical loan limit, has been eliminated.

Previously, if a homeowner had several liens on their home, for instance a first and second mortgage, the total of the liens could not exceed the geographical maximum mortgage limit for both purchase and refinance transactions.

So even if a homeowner had a first mortgage that was below the maximum loan limit, an associated second mortgage could push it beyond the limit and disqualify the loan from FHA financing.

As an example, if the homeowner lived in Los Angeles County where the maximum loan amount for a FHA loan is $729,750 and they had a first mortgage of $500,000 and a second mortgage of $300,000, they previously would not have qualified for FHA financing because the second mortgage would have exceeded the maximum amount for that geographical area.

Going forward, only the FHA-insured first lien is subject to this maximum loan limit.

However, FHA still requires that the combined loan amount of the FHA-insured first mortgage and any subordinate lien(s) not exceed the applicable FHA loan-to-value (LTV) ratio, which is generally 96.5 percent.

FHA loans accounted for a staggering 37 percent of all first mortgages in 2009, up from 26 percent in 2008 and just seven percent in 2007 and is expected to go higher.