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A Guide To Conforming Loan Limits In 2023

There can be a lot of confusion in the housing market, especially for first-time homebuyers . With so many terms and regulations to navigate, understanding the various types of available loans and their limitations can be overwhelming. One crucial limit to understand is the conforming loan limit set by the Federal Housing Finance Agency (FHFA) .

In this guide, we'll look at the conforming loan limit and what it means for homebuyers in 2023. We'll explore how the FHFA sets the limit and the criteria that Fannie Mae  and Freddie Mac , the two government-sponsored enterprises that purchase conforming loans from lenders, use to determine which loans to buy. We'll also discuss how the conforming loan limit varies by county and high-cost areas and what that means for homebuyers interested in properties above the limit.

To make informed decisions about your home purchase, you need to understand the conforming loan limit, regardless of whether you're a first-time homebuyer or a seasoned homeowner. In this article, we'll discuss what you need to know about conforming loan limits in 2023.

What Is The Conforming Loan Limit?

The FHFA decides what conforming loan limits to set for Fannie Mae and Freddie Mac, its two regulated government-sponsored enterprises.

Two major players in the mortgage industry, Fannie Mae and Freddie Mac, purchase mortgages from lenders that meet the company's standards to provide investors with mortgage-backed securities. In this way, lenders can continue providing mortgage loans at affordable rates to borrowers.

Additionally, Fannie Mae and Freddie Mac have minimum down payment, minimum credit scores, and maximum debt-to-income ratios (DTI)  for loans they purchase. Generally, though, people refer to conforming loan standards as loan limits when they talk about conforming loan standards.

So, what exactly are these limits?

As of 2023, the baseline conforming loan limit is $726,200, up from $647,200 in 2022. In Alaska and Hawaii, the limit for a 1-unit property is $1,089,300.

There is no doubt that getting a jumbo loan is your best bet if you need to borrow more than the conforming loan limit for the county where you live. However, these loans require a higher credit score and larger down payment, making them harder to qualify.

How the Conforming Loan Limit Works

Each county has its conforming loan limit. In most counties, the baseline conforming loan limit applies. However, regional economic differences may affect the conforming loan limit.

The maximum loan limit is, therefore, higher in areas where the local median home value exceeds 115% of the baseline conforming loan limit. The HERA sets the maximum loan limit based on the median home value in those areas. In addition, the legislation set a limit of 150% above the baseline.

Southern California, South Florida, and Greater New York are three examples of regions in the contiguous part of the country that meet the requirements for higher maximum conforming loan limits.

In addition, the HERA has provisions that establish different loan limits for Alaska, Hawaii, and two U.S. territories: Guam and the U.S. Virgin Islands. Since these areas are considered high-cost, the conforming loan limits tend to be higher than those for the domestic United States.

Conforming Loan Limits In High-Cost Areas

There are considerable differences in home prices between states and counties. As a result, a single conforming loan limit for the whole country is impossible since it's challenging to compare home prices in rural Ohio with those in Manhattan, one of the most expensive in the country.

Therefore, the FHFA has a higher limit for areas it considers to be "high-cost," a designation based on an area's median home value compared to the baseline conforming loan limit.

You can get a conforming loan up to 150% of the baseline conforming loan limit in a given area based on the median home value. To see the current limit in your county, check the FHFA's interactive map .

Example Of High-Cost Area Limits

It may be helpful to picture what this may look like in practice if you were considering buying a $800,000 house in California for your family.

There is a good chance that you will need to take out a jumbo loan if you would like to purchase the house in San Bernardino County since that county does not qualify as a high-cost area under the FHFA's program since you would be exceeding the $726,200 baseline loan limit for the county.

However, Los Angeles County is traditionally one of the most expensive areas to buy a house in the U.S. The FHFA may set official high balance loan limits near the top ($1,089,300 for a single-family home). It would be possible for you to purchase the house without a jumbo loan.

Besides the highest conforming loan limit in high-cost areas, the loan limit in Alaska and Hawaii is also the highest for a given number of units.

Special Considerations for the Conforming Loan Limit

Banks and other lending institutions rely on Fannie Mae and Freddie Mac for mortgage insurance and to purchase loans they wish to sell. The conforming loan limits are guidelines for mortgages offered by most mainstream lenders. The conforming loan limits act as guidelines for mortgages most mainstream lenders provide. In some cases, financial institutions will only deal with conforming loans.

The nonconforming or jumbo mortgage exceeds the conforming loan limit. Jumbo mortgages can carry higher interest rates than conforming mortgages.

Due to lenders' preference for conforming loans, borrowers with a mortgage amount slightly above the conforming loan limit should consider reducing the loan size through secondary financing (taking out two loans instead of one) or making a larger down payment to qualify for a conforming loan.

The Bottom Line: Be Aware Of Loan Limits If You're Purchasing A High-Cost Home

Suppose you plan on buying a home with a mortgage and have a sizable budget for your home purchase. In that case, it is crucial to understand the maximum loan limits in your area before you commit to a loan. While other loan types, like the jumbo loans, remove the requirement of staying within a certain price range, it would mean forgoing the benefits of getting a conforming loan.

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