Understanding California’s Conforming Loan Limits

California’s housing market is one of the most expensive in the country As a result, the conforming loan limits here are higher than the national baseline limits set by the Federal Housing Finance Agency (FHFA) In this article, we’ll explain what conforming loan limits are, how they work in California, and what it means for homebuyers.

What Are Conforming Loan Limits?

Conforming loan limits determine the maximum loan amount that can be considered a conventional mortgage by Fannie Mae and Freddie Mac. Loans at or below these limits are called conforming loans. They meet the underwriting guidelines set by Fannie Mae and Freddie Mac and can be purchased by these two government-sponsored enterprises.

Conforming loans have several advantages for borrowers:

• Lower interest rates and costs compared to jumbo loans or loans that fall outside conforming guidelines
• Easier to qualify for with standard debt-to-income ratios
• Can be used with low down payment mortgage programs like FHA and VA loans

Loans that exceed the conforming loan limits are called jumbo loans, They typically have higher rates and stricter underwriting standards

California Conforming Loan Limits

The baseline conforming loan limit set by the FHFA for 2023 is $726,200. However, the limit is higher in areas designated as “high-cost areas.” California has several counties and metro areas designated as high-cost.

Here are the current conforming loan limits for California

• Baseline limit: $766,600 (increased from $726,200 in 2023)
• High-cost area limit: Up to $1,152,000

High-cost counties include Alameda, Contra Costa, Marin, Napa, Orange, San Diego, San Francisco, San Mateo, Santa Clara, Santa Cruz, and Sonoma. You can check specific limits by county on FHFA’s website.

The conforming loan limits typically adjust annually based on changes in average home values. The limits increased substantially for 2023 due to rapid home price appreciation in 2021.

Conforming Loan Limit Calculation

The baseline conforming loan limit applies to most of the continental U.S. It’s calculated annually using a formula set by the Housing and Economic Recovery Act of 2008:

• The baseline limit is set at 65% of the conforming loan limit for Fannie Mae and Freddie Mac.
• It is adjusted annually based on the year-over-year increase in average U.S. home values, as measured by FHFA’s House Price Index.
• The baseline limit cannot increase or decrease by more than 7% from the prior year.

This formula helps keep conforming loans aligned with median home values nationally. The anti-fluctuation measure prevents wild swings in the limits.

For 2023, the baseline conforming loan limit increased by over 10% from 2022. But due to the 7% cap, it only increased by the maximum of 7% this year.

High-Cost Area Loan Limits

In more expensive real estate markets, like California, conforming loan limits are boosted above the baseline limit. These are known as high-cost area limits.

The process for calculating high-cost limits is:

• The baseline limit is multiplied by 1.25 to calculate the “ceiling” for high-cost areas. For 2023 this ceiling is $980,000.
• Using median home values, the FHFA designates metro areas where 115% of the median home value exceeds the baseline conforming loan limit.
• The high-cost limit is set at the lesser of:
  • 115% of the area’s median home value
  • The maximum high-cost “ceiling”

So in high-cost counties, borrowers can qualify for larger conventional loans while still meeting conforming guidelines. This provides better financing options in expensive markets like California coastal cities.

Impact on Homebuyers

California’s conforming loan limits for 2023 are $766,600 for most counties and up to $1,152,000 in high-cost metros like San Francisco and Orange County. This is an increase from $726,200 and $1,089,300 in most counties for 2022.

The higher limits allow more California homebuyers to qualify for conventional financing. Conforming loans have lower rates, more flexible qualifying guidelines, and down payment assistance programs.

Those purchasing homes above $766,600 will need jumbo loans. These mortgages can still offer competitive rates, but often have tougher approval standards. Working with an experienced loan officer is key to getting a jumbo loan.

Understanding conforming loan limits can help buyers pick the right mortgage option. The limits provide higher purchasing power in expensive markets like California. Checking the limits in your county ensures you get optimal home financing.