While the Federal Housing Finance Agency (FHFA) has not made an official announcement, it’s believed that the conforming limit for 2023 will be raised to at least $700,000. Most likely, the limits will be even higher, with many expecting base limits to reach $715,000 or more.
The FHA makes its changes annually, usually announcing new limits for the coming year on the last day of November. This year, many in the industry are jumping ahead and already predicting higher conforming loan limits.
What to Expect from Conforming and Conventional Loan Limits for 2023
2022 saw a large increase in conforming loan limits. With home prices soaring and demand constantly rising, the FHFA increased the base limit from $548,250 in 2021 to $647,200.
The limits are expected to rise once again. Reports are circulating that the FHFA will increase the base limit to over $700,000, while many are reporting that the base limit will land at $715,000.
An increase in loan limits will make more financing available to buyers. Anyone purchasing a home for a price between roughly $650,000 and $700,000 should be able, in 2023, to use a conforming loan, which can come with easier qualification standards, lower interest rates, and other advantages.
But it’s not just the base limit that should increase. It’s all but guaranteed that loan limits in high-cost areas will increase as well. In areas with high home prices, such as San Diego County, Los Angeles County, and the areas surrounding Silicon Valley, conforming loan limits in 2023 will almost certainly top $1 million.
Why the Expected Increase?
Again, we need to emphasize that these increases are not official. At least not yet. However, most in the industry agree that the base limit increase is practically guaranteed. Why? Because the FHFA sets the limits by looking at national prices. If home prices go up, they increase their limits accordingly.
Although we still have to get through a quarter of 2022, the limits are increasing significantly. Exact numbers change depending on which resource you consult, but the median sales price for the second quarter (April, May, June) increased by roughly 18% from the previous year. This means that the conforming loan limits should see an increase of roughly 18%.
There’s even a chance that the base loan limits could increase far beyond $700,000. While it doesn’t always work this way (the math is a little more complicated), if the base limit (currently $647,200) is raised by 18% to parallel housing-price increases, the limit would rise to $763,696!
High Loan Limits: What This Means to You, The Buyer
Even if you don’t use a conforming loan, the limit is an important factor in the industry, a benchmark that impacts borrowers and lenders alike. The loan limit is the maximum allowable amount that buyers can borrow and still have their loan qualify under the rules of Fannie Mae and Freddie Mac.
Anything over the conforming limit, which changes from county to county, is considered a “jumbo loan.” These types often have higher standards and can (but don’t always) have higher interest rates. Generally speaking, it’s more advantageous to have a conforming loan than a jumbo loan.
So with higher loan limits, more mortgages can be classified as “conforming.” Suppose you are making a home purchase with a total price of $750,000, which is not outrageous even in base-limit counties. If you bring a $75,000 downpayment (10%), you would need to finance $675,000. If your county uses the base limits, this would mean that the loan would be classified as “jumbo;” it would be ineligible for the benefits enjoyed by conforming loans.
With the new limits, this loan of $675,000 should be qualifiable as a conforming loan. Therefore, the lender may be able to offer more generous terms.
How are Conforming Loans Set?
So far, we have talked about the result. We have discussed increases in loan limits, but we really haven’t talked about where these increases come from or why they are set to a certain amount.
Conforming loans are set by the FHFA. The agency uses a calculation based on average U.S. home price increases for the previous year. An important part of their calculation is the Housing Price Index.
Much of this is related to economic history. The Housing and Economic Recovery Act, which was passed in 2008, established the formula that is still used to determine conforming loan limits. The law required, essentially, that loan limits be tied to housing prices. It also stipulated that raises in limits could only happen once home prices reached pre-recession levels. The condition was met in 2016 when the FHFA increased limits for the first time in a decade. Loan limits have been rising steadily ever since to match the reality of ever-more-expensive property prices.
Looking at the index, as well as other numbers, we can assume that another large jump in loan limits will be coming soon.
Will This Impact FHA and VA Loans?
Conforming loan limits are not used for VA and FHA loans. These programs have a different system, but conforming loans can have an indirect impact on this form of financing.
VA loans do not have an official limit. Lenders can loan any amount they see fit, while the VA guarantees a certain portion of the loan, thereby reducing risk to lenders. “VA limits” are usually defined as the amount you can borrow without needing a downpayment. However, VA loans often follow conforming loan limits, which means a VA-loan borrower should be able to borrow up to the amounts without needing a downpayment.
FHA loans, on the other hand, do have limits. They are calculated by the FHA’s guidelines, but if conforming loans are rising, you can bet FHA loan limits will also increase.
You Deserve a Mortgage that Fits Your Purchase!
If you are considering a home purchase in 2023, you can likely enjoy the benefits of increased loan limits. Whether you live in a high-cost area or a place that uses the base limits, you’ll have more borrowing power than ever before.
Contact our team and let us help you find the ideal mortgage for your home purchase!