Each year, the Federal Housing Administration (FHA) is required — under the Housing and Economic Recovery Act of 2008 (HERA) — to amend home loan limits in accordance with market trends. The FHA calculates the median house price within a country-level jurisdiction and then sets a loan limit at 115% of this median value. This is $548,250 nationwide, although areas classed as high value may have the FHA loan limit raised to $822,375. The FHA also applied a lower limit for loans in areas of lower property values — $356,362 is the national minimum loan limit. In addition, the FHA released details of changes to FHA down payment guidelines for buyers of 1-4 unit properties.
In this article, we are going to be taking a look at the current property markets in locations such as Dallas and Collin County in Texas and in Broomfield, Colorado, and how these FHA announcements will affect these property markets moving forward.
Before we get into the local analysis, it is first important to define exactly what a one- to four-unit property actually entails. A unit of property is any property that is functionally independent. For example, a house is a single-property unit, as is a single condominium apartment. In most cases, a house with a portion converted into an apartment for sub-letting would also be considered a single unit, as the two portions are not functionally independent from one another. So, the purchase of a multi-unit property would usually involve buying several independent houses within one development or several condominium apartments within a block. Qualifying buyers will be able to purchase up to four of these units with a 3.5% FHA down payment.
Dallas, Texas, like many other counties and cities across the United States, has been hit hard in 2020. The year began brightly, with accelerating economic growth at the end of 2019 powering forth into the opening months of 2020. The future — or at least the near future — looked to be a positive one, and spirits were high as we entered a new decade. Then COVID-19 took hold, and the situation rapidly changed. As the pandemic caused misery and tragedy across Dallas County, a range of economic indicators also began to suffer. Factors such as employment, consumer spending, and natural resource sourcing and processing all experienced downturns as measures designed to halt the spread of COVID took their toll. Later in the year, these economic indicators began to climb again as COVID case rates began to slow across the state. However, uncertainty remains in Texas, as it does in other locations around the country, and recovery is slow. It looks likely to remain this way, as infection rates have increased once again in Texas as we near the end of the year. However, it seems as if the economic instability and uncertainty were not reflected right across the board. In May of 2020, while COVID-19 case numbers really began to soar in Texas, the Texas Tribune reported that property prices had continued to rise even as other areas of the economy ran into trouble. Homeowners seeking appraisals for their properties were left surprised when they received valuations that seemed to have been unaffected by the pandemic. These values displayed a year-on-year increase from 2019.Property taxes have risen too, as local governments try to bolster a dwindling tax base. During times of "crisis," the local government is allowed to raise property taxes to 8% without approval from voters — usually, the cap is set at 3.5%. With one in eight working-age Texans registered as unemployed in May of 2020, government departments are looking elsewhere for tax revenue, which is driving property prices up and up. FHA has imposed the reduced rate loan limit on both Dallas and Collin County for 2021. Fannie Mae and Freddie Mac will be able to process home loans up to the value of $411,750 in the counties.
Indicators for Northern Colorado's property market were strong at the beginning of 2020. In January 2020, the Coloradoan reported high levels of growth for property prices in various counties across the region. Figures also suggested that 10,900 residential properties would be sold throughout 2020 — an increase of 166 on 2019. At this point, Colorado's economic growth was positive. However, the advent of COVID-19 sent the state's economy plummeting, with predictions of a $2.4 billion shortfall in general fund revenue for the 2020-21 fiscal year. Similar to what happened in Texas, local government achieved powers that would enable them to increase residential property taxes beyond previously mandated limits. Prior to the passing of Colorado Amendment B in November 2020, residential property taxes could make up no more than 45% of total property tax revenue. Following the Amendment's drafting into law, this limit is no longer in place. Property prices were already rising beyond national averages, however, and this is reflected in the FHA's modification of the mortgage limit base level in Colorado. Sixteen of Colorado's counties have applied a higher than that of the nationally implemented base level. Compare this to only eight counties in neighboring Utah and only one in Wyoming to the north. Broomfield County, Colorado is one such county that has seen the implementation of a modified home loan limit. Homebuyers in Broomfield County will be able to work with Freddie Mac and Fannie Mae on home loans of up to $596,850 — almost $40,000 above the base level.
We have already seen how property buyers in Colorado and Texas can benefit from the increased limits on home loans handled by Fannie Mae and Freddie Mac, but what impact does the change in down payment guidelines have? Well, this change provides unprecedented opportunities for property investors in Broomfield, Colorado, metropolitan Denver, across Dallas and Collin County, Texas, and elsewhere in the country. Investors can purchase up to four property units within a development, selecting one to inhabit on a residential basis if required, maximizing returns on investment with a lower down payment. The investors can then obtain rental income by leasing the remaining three units to interested parties. They may also have the opportunity to modify units within their property purchase for other purposes, such as transforming units into commercial or retail spaces. This is, of course, subject to local legislation and zoning permission.
Reach out to our team to find out more about modified loan limits and down payment guidelines in your area, and to take steps toward adding a multi-unit property to your portfolio. Alternatively, apply online for financing today.
Buying a 4-unit property but using one as your primary residence is a great way to start or grow your investment property portfolio. With a minimum of 3.5% down payment, it is simple to start investing in real estate.