The overall strong real estate market has seen major booms in the last few years. The increase in average prices have led to a change in the Fannie Mae and Freddie Mac conventional loan limits, yet again.
For the year 2023, the maximum loan limit amount allowed by either Freddie Mac or Fannie Mae for a conventional loan will be $726,200.
For perspective, the maximum loan amounts in the year 2022 were $647,200. The new increase is $79,000 or approximately 12% over 2022 loan limits.
Higher Loan Limits are Better Alternative to Jumbo Loans
The main benefit to borrowers is that a conforming loan is a better alternative to a jumbo loan. A jumbo loan is any mortgage that is over conforming loan limits.
Jumbo loans have tighter restrictions for qualifying a buyer. They require a large down payment, usually between 10% and 20%.
They will also require a significant amount of money in reserves, usually enough to cover 6 to 12 months’ worth of mortgage payments.
And the credit guidelines for jumbo loans are generally more restrictive.
Now, thanks to the increase in loan limits, more borrowers can apply for the homes that are priced between $647,200 and $726,200 that were previously not available.
Understanding the Basics of Loan Limits
Loan limits are the highest loan that can be approved based on a set of established guidelines. In this case, the guidelines are established by the two governing bodies Fannie Mae and Freddie Mac.
Neither Fannie Mae nor Freddie Mac lends money directly to home buyers or homeowners. Instead, both organizations set up rules for lending money for either a home purchase or mortgage refinance. The rules cover everything about a mortgage loan such as credit scores, debt to income ratios, appraisal requirements, home title insurance, and many other things.
Lenders, such as banks, credit unions, and mortgage lenders get approval from Fannie Mae and Freddie Mac to offer their programs, provided that the rules are followed.
From time to time, changes will be made to the rules. The changes are a response to the general economy and seek to help home buyers while also protecting the lenders from possible loss.
The new increase in loan limit amounts is a direct reflection of the rise in average home prices across the country.
Specifics of the New Loan Limits
The maximum loan limit is based on the size of the property. Fannie Mae and Freddie Mac both allow financing of single-family homes as well as multi-unit buildings. Here is a chart of the loan amounts based on the size of the building
- Single unit home (typical single-family home) $726,200
- 2-unit building (also called Duplex) $929,850
- 3-unit building (also called Triplex) $1,123,900
- 4-unit building (also called Quadplex) $1,396,800
These are in effect for the majority of areas across the country.
High-cost areas, like New York City and Los Angeles, enjoy an even bigger boost in loan limits. Websites for both Fannie Mae and Freddie Mac have lists of the designated areas available for the higher cost loans.
Here is the breakdown by units for high price locations.
- Single unit home (typical family home) $1,089,300
- 2-unit building (also called Duplex) $1,394,775
- 3-unit building (also called Triplex) $1,685,850
- 4-unit building (also called Quadplex) $2,095,200
Good News for Refinance Options Too
This is also great news for people looking to refinance who were previously locked into a jumbo loan.
Since those people were required to make a larger down payment, they moved into a home with instant equity. The overall rise in home prices for the last 3 years has also helped them gain more equity.
These homeowners can take advantage of the equity and new mortgage rates and tap into the home’s value with a conforming loan refinance.
New Loan Limits Apply to Investment Loans as Well
The new loan limits are applicable to both homeowners and investment property loans.
As mentioned above, Fannie Mae and Freddie Mac will allow qualified borrowers to purchase a multi-unit home.
People that are interested in either buying a multi-unit home to live in while renting out the other units or simply buying a building for the express purpose of renting out all the units, can benefit from the new limits too.
Keep in mind that some lenders will have additional mortgage overlays for investment loans compared to a loan for someone wishing to move into the property as their main residence.
Summing Up 2023 Conforming Loan Limits
Thankfully the economy of the United States has been on an upward climb for several years. Wages are increasing and unemployment is really low, leading to more demand for houses. This demand has increased home prices and kept mortgage rates low. The new loan limits should open the doors of owning a home to many more borrowers and hopefully keep the economy chugging along.