Conforming Loan Limits For 2023: A Complete Guide
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When buying a house, a conforming loan can be advantageous because it meets specific criteria and will have lower interest rates than nonconforming loans. However, conforming loans must meet several requirements, the most important being the conforming loan limit.
In this article, we’ll discuss conforming loan limits, how they work and the 2023 conforming loan limits.
What Is The Conforming Loan Limit?
The conforming loan limit is the maximum dollar amount set each year for mortgages that Fannie Mae and Freddie Mac will buy or guarantee. When home loans meet all the requirements of both agencies, they’re known as conforming loans. In November of each year, the Federal Housing Finance Agency (FHFA) sets the conforming loan limit for the following year.
What Is A Conforming Loan?
A conforming loan is a type of home loan that meets the purchase and sale standards set by Fannie Mae and Freddie Mac. To qualify for a conforming loan, you’ll need to have a:
- Credit score of at least 620
- Debt-to-income ratio below 50%
- Maximum loan-to-value ratio of 97%, which means you’ll need to put at least 3% down
Mortgages that fall under the conforming loan limit are considered conforming loans, and loans that exceed the limit are called jumbo loans. The limit is adjusted each year to reflect changes in the average U.S. home price.
How Much Is The Conforming Loan Limit For 2023?
The baseline conforming loan limit for 2023 is $726,200. This number has increased since 2022, when the limit was $647,250. In some high-cost areas where the median house price exceeds the limit, the ceiling loan limit for borrowers is $1,089,300. This increase of over 5% reflects the increase in the average home value in the U.S.
How Do Conforming Loan Limits Work?
The conforming loan limit is set by the Housing and Economic Recovery Act (HERA) and designated by each county. The FHFA bases each year’s restrictions on their House Price Index report. Most counties will be assigned the national baseline limit, which reflects the change in the average U.S. home price.
Because the FHFA uses the House Price Index to determine the following year’s loan limits, the annual loan increases in loan limits are automatic. Each time home prices rise, the FHFA reacts by increasing mortgage limits. This helps the mortgage industry naturally fluctuate with the housing industry.
Conforming Loan Limits For High-Cost Areas
Some areas that satisfy requirements for higher maximum conforming loan limits will be assigned higher limits. This is typically true in notably expensive metropolises where the local median home value exceeds the baseline conforming loan limit by at least 115%.
This higher limit exists because of the level of difficulty when comparing the cost of homes in rural areas versus large cities where prices tend to be significantly higher. The ceiling on the limits in these areas is 150% of the baseline loan limit.
These high-cost areas include cities such as San Francisco, New York City and Washington, D.C. The FHFA also has higher baseline conforming loan limits for Alaska, Hawaii, Guam and the U.S. Virgin Islands. You can also use the FHFA’s interactive map to see if your county qualifies for these higher limits.
If your home exceeds the conforming loan limit, you have one option. You can pay a higher down payment to ensure you're not borrowing more than the conforming loan limit.
Benefits Of Staying Within The Conforming Loan Limits
- Lower APR: The primary advantage of a conforming loan is the lower Annual Percentage Rating (APR). The APR on a loan indicates how much a loan will cost you and includes the fees that lenders will charge you to originate your loan. Therefore, a lower APR will affect the fees and interest that you’ll pay on your loan, thus resulting in lower monthly payments and less money spent over the life of the loan.
- Lender preference: In addition to saving money, traditional lenders prefer to work with home loans that fall within the conforming loan limits. Fannie Mae and Freddie Mac insure these loans, so they’re safer for the lender to sell. They’re also easier for lenders to sell because they follow so many regulations.
- No residency restrictions: Conforming loans through Fannie Mae and Freddie Mac aren’t restricted to primary residences. This means that if you’re in the market for a second home or investment property, you may be able to take out a conforming loan permitting that you meet the necessary qualifications.
Conforming Loan Limits FAQs
Here are some of the most frequently asked questions regarding conforming loan limits.
How can I avoid the conforming loan limits?
To avoid using a jumbo loan to purchase your home under the conforming loan limits, you have two options. You can take out a second mortgage or make a larger down payment.
Is a conforming loan the same thing as a conventional loan?
Although often used interchangeably, conforming and conventional loans are not the same. A conventional loan is defined as one that is not guaranteed by government backing, while a conforming loan is simply a mortgage that conforms to the guidelines set forth by Freddie Mac and Fannie Mae.
Do conforming loan limits change over time?
Yes, FHFA housing officials change the conforming loan limits on an annual basis to reflect the increase in median home value. Conforming loan limits are changed on January 1st of each year and remain the same for that calendar year.
The Bottom Line
A conforming loan is one that meets all the criteria of both Fannie Mae and Freddie Mac. One of the most important requirements is the conforming loan limit, or the annual cap on the dollar amount that a lender can guarantee. These limits are determined each year by the FHFA and are decided in large part by the average home value in the U.S.
There are many benefits to getting a conforming loan, including a lower total cost of borrowing and being able to work with favorable lenders.
If you’re in the market for a new home, get started on the mortgage loan process today.