The agency, which insures low down-payment mortgages, is reducing the upper limits of what it will backstop in areas where home prices are high.
Starting in the new year, the biggest cap in these areas will drop to $625,500 from $729,750. Limits will be set lower in about 650 counties as a result, the agency said.
The FHA will maintain current limits in areas where home prices are lower and said the move will allow it to refocus on less wealthy homebuyers.
The agency stepped in amid the housing market meltdown -- which was at the core of the 2008 financial crisis -- and raised limits so it could help more homebuyers. The FHA said the program quadrupled its activity "as the private market retreated."
But by doing so, it took also significant hits from defaults, and the agency has been trying to right its own balance sheet.
FHA Commissioner Carol Galante said the new changes are "an important and appropriate step as private capital returns to portions of the market and enables FHA to concentrate on those borrowers that are still underserved."
The agency does not make home loans, but insures lenders against losses, allowing buyers who can afford as little as a 3.5% down payment to receive a mortgage.