With home prices continuing to post double-digit year-over-year gains, the federal government is raising the limits for the loans it backs — including mortgages over $1 million for high-cost areas.
The cap for home loans backed by Fannie Mae and Freddie Mac — two government-controlled entities that buy mortgages from lenders — will rise this year to $726,200 in most of the U.S. and $1,089,300 in high-cost markets, which includes parts of California, New York and Virginia.
Key takeaway: Larger conforming loan limits for 2023 will allow homebuyers to qualify for bigger mortgages backed by the government.
New ceiling for 2023 conforming loans
Each year, the Federal Housing Finance Agency updates the guidelines that determine what size loans are classified as “conforming.” The government guarantee makes conforming loans less risky for banks to offer. So if you get approved for a conforming loan, you may get a better interest rate than you would with a nonconforming loan.
Here’s what you should know about the 2023 conforming loan limits.
- Loan limits rise along with home prices — The FHFA based the increase for conforming loan limits on its House Price Index for the third quarter of 2022. Though the real estate market has softened some this year, home prices increased 12.4% from the third quarter of 2021 to the third quarter of 2022.
- Rapid real estate price changes — Looking back to 2020, conforming loan limits were just $510,400 for one-unit properties in most of the U.S. and $765,600 for high-cost areas. That means conforming loan limits have risen about 42% in just a few years for most areas.
How to get your finances ready to buy a house
More expensive home prices mean it’s especially important to review your finances to make sure you’re prepared to buy a house. Rising interest rates mean you’ll also want to estimate how much home you can afford.
Here are some items you’ll want to think through.
- Save for your down payment. How much down payment do you need? Many banks offer conventional loans with down payments as low as 3%. Government-backed mortgages like FHA loans allow down payments starting at 3.5%, and VA loans and USDA loans may require no down payment at all.
- Take stock of your credit health. In addition to saving for a down payment, getting your debt-to-income ratio under 43% and improving your credit scores are good steps to take when you’re preparing to get a home loan.
Tips for choosing the best mortgage lender
Just as you’ll be shopping around to find the right home, you should shop for mortgage options to find the right loan for your situation. When choosing a mortgage loan, there are a few factors to discuss with any potential lenders: the type of loan that’s right for you, the interest rate, any additional costs and fees you’ll pay, and the loan term, which typically ranges from 15 to 30 years.
- Loan types — You may be able to choose from conventional loans, FHA loans or other types of government-backed home loans. Ask lenders about specific features you want from your mortgage — such as a low down payment or the ability to finance certain closing costs.
- Interest rate options — There are two basic types of mortgage interest rates to discuss with your lender: fixed and adjustable. Fixed-rate mortgages are a good choice if you plan to stay in the home a long time.
- Costs and fees — When comparing lenders, ask about items such as closing costs, discount points and prepayment penalties that might affect the cost of your loan.