The Federal Housing Finance Agency (FHFA) recently announced new loan limits for 2023, which will provide more flexibility to homebuyers in high-cost areas. These are known as conforming loan limits.
The baseline conforming loan limit for a single-family home increased from $647,200 in 2022 to $726,200 for 2023 for purchases in the contiguous 48 states, DC, and Puerto Rico. The loan limit for Alaska, Hawaii, and high-cost areas increased from $970,800 to $1,089,300.
This news is particularly significant for potential homebuyers looking to purchase a property in an area with higher housing costs. It means they may have access to larger loans than previously available.
In this blog post, we’ll explore what conforming loan limits are, how they are determined, and their significance to homebuyers.
What are Conforming Loan Limits?
Conforming loan limits are the maximum loan amounts that can be borrowed by an individual borrower using a mortgage that is eligible to be purchased by Fannie Mae or Freddie Mac, which are two government-sponsored entities that buy and guarantee mortgages in the United States.
The FHFA sets conforming loan limits, and they are adjusted annually to reflect changes in the national average home price. After a long period with no changes, from 2006 to 2016, this year will be the 7th year in a row that the conforming loan limit has increased.
You may wonder what happens if your loan amount exceeds the conforming loan limit. In that case, it is considered a jumbo loan, which typically has higher interest rates and stricter underwriting requirements. A jumbo loan is an example of a non-conforming loan.
How Loan Limits Are Determined
The FHFA determines the conforming loan limits based on the national average home price. The FHFA is a government agency that regulates Fannie Mae and Freddie Mac, the two government-sponsored entities that purchase and guarantee mortgages in the United States.
Each year, the FHFA reviews the national average home price data provided by the Federal Housing Administration (FHA), a division of the Department of Housing and Urban Development (HUD). The FHFA then sets the conforming loan limits based on this data.
The FHFA uses a formula to calculate the conforming loan limits for each county in the United States. The formula takes into account the average home prices in each county and adjusts for inflation. In high-cost areas, the FHFA sets higher conforming loan limits to account for the increased cost of housing there.
The conforming loan limits are announced each year in November and go into effect on January 1 of the following year. The FHFA may also adjust the limits during the year if there are significant changes in the national average home price.
Significance for Homebuyers
Overall, the new loan limits provide even more opportunities for homebuyers looking to purchase a new home. With these increased limits, more buyers may now be able to qualify for a mortgage that was previously out of reach for them.
Depending on where you want to live and your finances, the increase in the conforming loan limits could help you afford your dream house.
If one of your goals in 2023 is to buy a house, contact an FHM loan officer today to discuss the right financing options for you.
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