A FHA loan requirement that the sum of all liens not exceed the maximum geographical loan limit has been eliminated, according to a Mortgagee Letter from HUD.

Previously, the sum of all liens (first and second mortgages) could not exceed the geographical maximum mortgage limit for both purchase and refinance transactions.

In other words, even if the first mortgage was below the maximum loan limit, an associated second mortgage could push it beyond the limit and disqualify the loan from FHA financing.

For example, in Los Angeles county the maximum loan amount for a FHA loan is $729,750, meaning a loan of that size wouldn’t qualify for FHA financing if it had a second mortgage behind it.

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.

The FHA has made a number of changes recently to improve its balance sheet, including the introduction of a minimum credit score requirement and higher mortgage insurance premiums.

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.