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Limits set for FHA-insured mortgages Change may hurt housing recovery

Buyers beware: Prized mortgages insured by the Federal Housing Administration soon will become harder to get on homes that cost several hundred thousand dollars.

Starting in October, the government is set to lower the maximum amount that can be borrowed and still qualify for FHA insurance.

Without FHA loans, borrowers will have to apply for conventional mortgages, which may be subject to higher interest rates and down payments of 20 percent.

FHA loan limits are meant to reduce the government's involvement in markets that are traditionally well served by private lenders. The limits vary from community to community nationwide and are based on area median home prices. The ceiling nationwide will range from a low of $271,050 to a high of $625,500, according to the U.S. Department of Housing and Urban Development. In Erie County, the limit is $276,250, or more than double the Buffalo Niagara region's median sale price.

But the change will have the greatest impact in high-cost markets, potentially dampening the housing recovery in those hard-hit areas, industry observers say.

FHA mortgages are popular with many buyers, particularly those looking for their first homes, because the loans feature attractive interest rates and down payments of as low as 3.5 percent. Last year, FHA insured more than 40 percent of home-buying loans in the United States.

"FHA is the best deal in town," said Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter.

Buyers who may be affected should start looking for homes soon because it takes 30 to 45 days to finalize mortgages, experts say.

The lower loan limits were supposed to take effect in January 2009, but ongoing problems in the credit markets prompted Congress to postpone the changes. Now, those limits will take effect Oct. 1, unless lawmakers take action.

Many buyers are convinced that Congress will address this now that the debt ceiling crisis has passed. But don't count on it, said Mark Brandemuehl, vice president of marketing for Movoto.com.

"In the current political environment, that seems a bit of a stretch," he said.