The Department of Housing and Urban Development (HUD) announced via press release the new conforming loan limits for 2023. The new conforming loan limit is $726,200, which is a $79,000 increase from last year's limit of $647,200. In addition, the "conforming loan floor and ceiling increased to $472,030 and $1,089,300, respectively, for calendar year 2023." In areas considered low cost, the "floor" figure derives from 65% of the national conforming loan limit. In contrast, the ceiling for high cost areas is 150% of $762,200 conforming loan limit. Detailed information about the new guidelines can be found on the HUD website.
What This Means For Lenders
Mortgage lenders pay close attention to these guidelines, and for good reason. Of course, keeping up to date on instructions from the Federal Housing Administration (FHA) is a good idea for all industry professionals. There are more incentives to abide by conforming limits besides "following the rules." Let's dig a little deeper to why these limits exist, and why lenders need to know them.
Two sectors within the mortgage industry are primary lenders (originators) and the secondary market. The secondary market may purchase your mortgage from the originator and retain the rights to service the loan. This is where the conforming loan limits come into play. In short, the secondary market will only purchase loans within the established guidelines. Therefore, originators that plan to sell their loans to the secondary market must make sure their loans meet the secondary market standards.
What This Means For Borrowers
In short, more buyers have access to qualify for financing on more houses. “The increase in loan limits, commensurate with the increase in home prices, will allow qualified individuals and families to continue to access FHA-insured mortgages to achieve affordable home financing,” said Principal Deputy Assistant Secretary for Housing and FHA Lopa Kolluri. They still have to meet all of the benchmarks in place to receive the loan. For example, FHA loans require a 3.5% down payment, credit score above 580, and a 43% debt to income ratio (DTI). To put this into context, under the new limit, a home buyer can purchase a property using a conforming loan up to $472,030 in a low cost area. Under the FHA requirements they would need at least a 580 credit score, down payment of at least $16,521.05, and a monthly DTI less than 43%. An individual lender may have additional requirements, but these are the baseline standards for a conforming loan.
The increased limits are more inclusive for borrowers looking for a home on the higher end. The most common alternative for a home valued above the conforming loan limit is a jumbo loan. Some buyers view this as less than ideal because it would typically require a larger down payment. Going back to the previous example, a $472,030 home wouldn't have qualified for a conforming loan last year. The buyer would need a jumbo loan, which may require up to a 20% down payment, or $94,406. That's a substantial leap from the 3.5% down payment of $16,521.05. Buyers on that higher end can get a lot more house for a much more reasonable down payment.
More Resources for Conforming Loan Limits
Every year, HUD issues a Mortgagee Letter which breaks down Nationwide Forward Mortgage Limit. They also offer resources for home buyers, which lenders can pass along to their customers. It walks you through the home buying process and has information for each stage, from financing to closing.
