If you’re connected to a mortgage advisor or real estate professional – or if you happen to be following news about the housing market – you may have heard that mortgage loan limits have increased for 2023. But what does it mean for you?
Well, it could be a big deal if you’re in the market to purchase a home this year! Here’s why.
What are loan limits, anyway?
First, let’s take a step back and talk about loan limits generally. The Federal Housing Finance Agency (FHFA) updates Conforming Loan Limits – or the highest mortgage loan amount allowed for loans purchased by large investors Fannie Mae or Freddie Mac – toward the end of each year. Around the same time, the Federal Housing Administration (FHA) updates the maximum loan amounts for mortgages it insures. The FHFA calculates its new limits based on the year-over-year percentage increase in average home prices as of the third quarter. The FHA limits are set as a percentage of the new Conforming limits.
Note – the FHFA and FHA are separate entities.
Both the FHFA and FHA provide National baseline limits, which apply to much of the country. However, specific loan limits are prescribed by county and vary geographically, meaning certain designated high-cost areas have limits that exceed the baselines. Limits also vary according to the number of units in a property.
2023 National Loan Limits for One-Unit Properties
Loans that fall within the limits set for Conforming and FHA loans may be underwritten according to the guidelines of their respective purchaser/insurer. These guidelines include specific requirements for credit score, debt-to-income ratio, loan-to-value, employment, and income history, down payment, and more. For example, a borrower who needs a loan that exceeds the conforming loan limit would need to consider a different financing product, like a Jumbo loan. Non-qualified Mortgage (Non-QM) loans like Jumbo loans tend to have stricter requirements, may not offer the lowest interest rates, and may carry higher closing costs compared to conforming and FHA loans.
What do limit increases mean for homebuyers?
The National baseline loan limits for Conforming Loans and FHA Loans increased by $79,000 and $51,350 respectively, from 2022 to 2023, in step with the significant increase in average home prices throughout the country. To illustrate why this matters, let’s consider a hypothetical situation:
Let’s say you began looking for a new home in 2023 and determined that your budget could accommodate a mortgage of $700,000. For this example, we’ll imagine you’d like to purchase a home in a county that shares the National Conforming Loan Limit. Back in 2022, a loan of $700,000 would have exceeded the previous conforming limit of $647,200. Unless you had extra cash to put down, you likely would have been ineligible for a conforming loan – even if you met every other requirement. You could have considered a Jumbo loan, but that would typically require a larger minimum down payment, a higher minimum credit score, and additional cash reserves.
Now that that the Conforming Loan Limits have officially increased to $726,200 beginning January 1, 2023, you can pursue a conforming loan for your $700,000 mortgage. This means the lower minimum down payment requirements (as low as 3% in some cases), lower minimum credit score requirements, less restrictive debt-to-income ratio requirements, and potentially lower interest rates and financing costs.
So, to put it plainly, increases in the loan limits mean homebuyers have access to better financing options that could effectively save them money!
How can I find the loan limits in my area?
To find out the loan limits in your area, and to better understand what they mean for you, reach out to a mortgage advisor. You can also find the full list of Conforming Loan Limits for 2023 on the Federal Housing Finance Authority (FHFA)’s website, and the FHA Loan Limits for 2023 on the U.S. Department of Housing and Urban Development (HUD)’s website.
What if the amount I need to finance exceeds the loan limit in my area?
It’s important to remember that these limits apply to the loan amount – or the amount being financed, not the price of the home itself. If you’re close to the limit, you may be able to qualify by increasing your down payment, thereby reducing the amount financed. If that’s not in the cards for you, there are other loan products you can explore.
Your mortgage advisor is your best resource for finding the loan program that’s right for you. Find an Axia mortgage advisor near you for a free consultation.
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