- The Federal Housing Finance Agency raised its conforming loan limit values for mortgages in 2023.
- In most of the US, the agency raised the conforming loan value from $647,200 to $726,200.
- The increase will help more borrowers afford a home purchase but could also put them at risk of becoming cost-burdened.
The US home buying frenzy during the pandemic — which saw home prices rise at a steep pace and buyers going to great lengths to get a home under contract — fizzled out over the summer as a mix of high home prices and borrowing costs reduced purchasing power for many prospective buyers. However, updates from The Federal Housing Finance Agency, which has increased its conforming loan limit values for Fannie Mae and Freddie Mac mortgages in 2023, will likely change the equation for many homebuyers.
Under the The Housing and Economic Recovery Act, the FHFA is required to raise their baseline ceiling loan limit — or CLL value — each year to reflect adjustments to the average US home price. Due to the rapid home price growth seen over the past year, the agency raised the CLL value for one-unit properties by 12%, going from $647,200 to $726,200 in most of the United States. However, in high-cost areas of the country, such as New York City or San Francisco, the loan limit ceiling has been changed to $1,089,300.
These increases could open up opportunities to Americans who otherwise would not qualify for mortgage financing — or would have had to receive a jumbo loan — due to the nation’s still-yet-high home prices.
Under the new conforming loan limits, first-time home buyers can qualify for as much as 97% in loan financing and non-first time buyers can receive up to 95% for a conventional mortgage. In other words, first-time buyers would only need to come up with enough cash to cover 3% of a home’s cost at closing. But buyers who put less cash down at closing will have to face higher monthly mortgage payments.
By opening up conventional mortgages to more buyers, it’s likely to draw more Americans back to the frothy real estate market, especially those struggling to afford the considerable cash on-hand needed for a down payment.
But while these new changes may be encouraging to some, Melissa Cohn, the regional vice president of William Raveis Mortgage, warns that it could spell trouble for borrowers who are looking to stretch their budgets to qualify for the most home they can at the time.
“The bank will help you stretch, but how far do you really want to stretch and is it comfortable?” she told Insider. “What Fannie and Freddie deem you can afford versus how you can really live are two different things.”
While higher loan limits open up more possibilities for buyers, they also put borrowers at risk of stretching their finances too thin and becoming over-leveraged. It all comes down to the fact that economic headwinds, such as surging inflation and higher interest rates, have put more Americans in jeopardy of becoming cost burdened or house-poor. With rising home costs, higher property taxes, and a possible recession looming in 2023 — which could trigger mass job losses and — borrowers who exceed their budgets to qualify for a home loan may find themselves in greater financial trouble.
“As a homebuyer, you need to make sure you are being smart about how much you are spending on a home,” Cohn said. “You need to make sure that you have money left over for the rest of your life and not just making your mortgage payment.”
Higher loan limits are a double edged sword for first-time buyers
Cohn is not alone in her thinking. Jacob Channel, the senior economist at data mortgage marketplace LendingTree, says that while raising conforming loan limits isn’t necessarily a bad thing, the economy’s rocky footing makes it more risky for some borrowers.
“This year we might enter into a recession,” Channel told Insider. “Even if we don’t enter it physically, the economy will likely soften and the jobs market will probably get a little bit worse. It goes to show that with the economy on shaky grounds — even if some things are improving — there’s always a chance that something that was once affordable becomes unaffordable.”
Several economists and financial experts have called for a possible recession in 2023. There have already been tens of thousands of layoffs in the tech industry, and large financial institutions project there will be many more to come this year.
While affordability will largely depend on each individual’s financial situation, Channel says that first time home buyers — who typically need more financial assistance on a downpayment — are especially vulnerable in biting off more than they can chew.
“Broadly speaking, a demographic that could face some challenges would maybe be someone like a first-time homebuyer who really doesn’t understand that just because the conforming loan limit is over $700,000, it doesn’t necessarily mean that you have to seek out a house that butts up right against that conforming loan limit,” he said.
According to him, borrowers — first time and repeat buyers — need to be diligent about assessing their finances and to be honest with themselves about what they can afford. “It’s one of those things that it’s honestly kind of common sense,” he added. “The more money you borrow, the more money you have to pay back, often the harder it is, the more likely you are to default.”