Mortgage Conforming Loan Limits Reach $1 Million

Conforming loans are eligible for backing by Fannie Mae and Freddie Mac.

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In 2023, the federal government will back mortgage loans upwards of $1 million for the first time, highlighting the breakneck pace of home price appreciation over the last two years. The update from the Federal Housing Finance Agency (FHFA) comes as the national housing market has started to cool.

Key Takeaways

  • The FHFA has released the new conforming loan limits for 2023, exceeding $1 million in high-cost areas for the first time.
  • The baseline conforming loan limit for homes in other areas increased to $726,200.
  • Conforming loans are eligible to be acquired by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

New Conforming Loan Limits to Make Higher-Priced Homes Less Expensive

Conforming loans are mortgage loans that meet certain standards set by GSEs Fannie Mae and Freddie Mac, one of which is the size of the loan. Each year, the FHFA sets the conforming loan limit based on the FHFA House Price Index, ensuring that the limit reflects the reality of the housing market.

Between the third quarter of 2021 and the third quarter of 2022, housing prices increased by an average of 12.21%, according to the index. As such, the FHFA increased the conforming loan limit for one-unit properties to $726,200. In high-cost areas, that limit is multiplied by 150% to $1,089,300.

High-cost areas are defined as areas in which 115% of the local median home value exceeds the baseline conforming limit. Alaska, Hawaii, Guam, and the U.S. Virgin Islands are included due to special statutory provisions.

Loans that exceed the conforming loan limit are called jumbo loans and typically come with higher interest rates, closing costs, and down payment requirements. As a result, the increase for 2023 may make higher-priced homes more affordable for homebuyers.

New Limits Highlight the Recent Boom in Home Prices

While the housing market in the U.S. has started to cool, the increase in conforming loan limits over the last few years shows just how quickly home prices have skyrocketed. Here's a quick recap of the limits for 2019, 2020, 2021, 2022, and 2023:

 Year Conforming Limit High-Cost Area Limit  Increase
2023 $726,200 $1,089,300 12.21%
2022  $647,200 $970,800 18.05%
2021  $548,250 $822,375 7.42%
2020  $510,400 $765,600 5.38%
2019 $484,350 $726,525 6.9%

But as interest rates have risen in 2022, exceeding 7% for the first time in two decades, the housing market has started to cool. Fannie Mae expects home prices to decline by 1.5% in 2023, and other analysts, including those at Goldman Sachs, suggest that prices can drop by as much as 10% next year.

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