Conforming loan limits are the maximum loan amounts that Fannie Mae and Freddie Mac will purchase from lenders. The Federal Housing Finance Agency sets these limits annually based on the average home price in a given area.
Conforming loan limits exist to ensure that homebuyers have access to affordable financing options. It also restricts Fannie Mae and Freddie Mac from purchasing mortgages for homes that exceed a certain price range.
What is the Conforming Loan Limit?
It is the maximum amount of a mortgage loan that Fannie Mae and Freddie Mac will purchase from lenders. It is set annually by the Federal Housing Finance Agency based on the average home price in a given area.
The limit is to ensure that Fannie Mae and Freddie Mac are only purchasing mortgages that are within a reasonable price range.
How the Conforming Loan Limits Work in 2023
The Federal Housing Finance Agency (FHFA) will set the conforming loan limits in 2023. It will be based on the average home price in a given area.
Most experts predict that they will be similar to the conforming loan limits 2022, which were $647,200 for most areas and up to $970,800 for high-cost areas.
Borrowers whose mortgage loan amount is at or below the conforming loan limit may be eligible for lower interest rates and more favorable loan terms than those with loans that exceed the limit.
Conforming Loan Limits in High-Cost Areas
Conforming loan limits in high-cost areas are higher than those in other areas. The FHFA sets specific limits annually based on the average home prices in those areas, which vary by location.
For 2022, the conforming loan limit in most areas was $647,200, but in high-cost areas such as San Francisco, Los Angeles, and New York City, the limit was up to $970,800.
Borrowers in high-cost areas may be able to borrow more money without having to take out a jumbo loan, which typically has higher interest rates and stricter qualifying requirements.
What to Consider Before You Borrow More than the Conforming Loan Limit
Borrowing more than the conforming loan limit may be necessary for some homebuyers, but it’s important to carefully consider the decision before doing so. Here are a few things to consider:
- Higher interest rates: Lenders typically consider loans that exceed the conforming loan limit as non-conforming or jumbo loans, which may have higher interest rates.
- Stricter qualifying requirements: Lenders may have stricter qualifying requirements for non-conforming or jumbo loans, such as a higher credit score, a larger down payment, and more reserves.
- Larger monthly payments: Borrowing more money will result in higher monthly payments, which could put a strain on your budget.
- Increased risk: Borrowing more than the conforming loan limit could result in a higher debt-to-income ratio and more financial risk.
- Limited options: Depending on the lender and the specific loan product, options for non-conforming or jumbo loans may be more limited than those for conforming loans.
Before deciding to borrow more than the conforming loan limit, it’s important to speak with a lender and carefully weigh the pros and cons to determine the best option for your specific financial situation.
Pros and Cons of Conforming Loan Limit
Pros:
- Lower interest rates: Conforming loans often have lower interest rates than non-conforming loans, which can save borrowers money over the life of the loan.
- Favorable loan terms: Conforming loans may have more favorable loan terms, such as lower down payment requirements and fewer closing costs.
- More options: Borrowers may have more options when it comes to conforming loans, as many lenders offer them.
- Easier to qualify: Conforming loans may be easier to qualify for than non-conforming loans, as they often have less strict qualifying requirements.
Cons:
- Limited loan amount: The conforming loan limit may not be enough to cover the cost of a home in some high-cost areas, which could limit a borrower’s options.
- Home price restrictions: Conforming loan limits are based on average home prices, which means borrowers in high-cost areas may not have access to conforming loans.
- No flexibility: Borrowers who need to borrow more than the conforming loan limit may not have access to the same loan terms and interest rates as those who do not.
- Mortgage insurance requirements: Lenders may require borrowers who make a down payment of less than 20% on a conforming loan to pay mortgage insurance, which can add to the cost of the loan.
It’s important for borrowers to carefully weigh the pros and cons of conforming loans to determine if they are the best option for their specific financial situation.
Conclusion
Borrowers whose mortgage loan amount is at or below the conforming loan limit may be eligible for lower interest rates and more favorable loan terms than those with loans that exceed the limit.
However, borrowers considering borrowing more than the conforming loan limit should carefully weigh the pros and cons before making a decision. It’s important to speak with a lender and consider your specific financial situation before making any borrowing decisions.
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