Fannie Mae Loan Limits Increase for 2023 – What You Need to Know

Fannie Mae has announced higher conforming loan limits for 2023 providing homebuyers with greater purchasing power. As the nation’s largest source of mortgage financing Fannie Mae’s loan limits play a key role in the housing market. This article provides an overview of Fannie Mae, an explanation of conforming loan limits, details on the 2023 changes, and what it all means for buyers.

What is Fannie Mae?

Fannie Mae (Federal National Mortgage Association) is a government-sponsored enterprise founded in 1938 to expand homeownership by making mortgage financing more accessible and affordable, They work with lenders to provide liquidity to the mortgage market by purchasing conforming loans from lenders and packaging them into mortgage-backed securities that are sold to investors This frees up capital for lenders to originate more loans Fannie Mae currently owns or guarantees about half of all mortgages in the U,S,

What Are Conforming Loan Limits?

Conforming loans are mortgages that meet the underwriting guidelines set by Fannie Mae and Freddie Mac. These guidelines include limits on the original loan amount for a given property and location. Loans at or under these limits can be purchased and securitized by Fannie Mae and Freddie Mac, making them easier for borrowers to obtain.

The baseline conforming loan limit applies to most of the country. In 2022 this limit was $647200 for a single-family home. In certain higher-cost areas designated by the Federal Housing Finance Agency (FHFA), higher limits apply. These are known as high-cost area loan limits. They can go as high as 150% of the baseline loan limit.

Conforming Loan Limits Increased for 2023

For 2023, Fannie Mae increased the baseline conforming loan limit to $726,200, up over 12% from 2022. This applies to a single-family home in most of the U.S. Higher limits up to $1,089,300 are in place for approximately 100 high-cost counties, mainly large metro areas.

This substantial jump in limits is due to rising home values across the country. By law, the baseline loan limit is set each year based on the average increase in home prices, as measured by FHFA’s House Price Index.

Why Do Loan Limits Matter?

Increasing conforming loan limits is generally good news for homebuyers. It means you may be able to qualify for a larger mortgage without having to take out a jumbo loan. This saves on higher interest rates and stricter borrowing requirements often associated with jumbos.

For example, take a buyer looking to purchase a $700,000 home in an area where the 2022 conforming limit was $647,200. With only a $52,800 difference, they may have opted for a conforming loan to get better terms.

But with the limit rising over $78,000 for 2023, more buyers will be able to stay under the conforming threshold for homes priced between $647,200 and $726,200. This provides increased purchasing power and flexibility.

Of course, buyers can still choose jumbo loans if needed. But conforming loans offer notable advantages thanks to the government backing from Fannie Mae. These include:

• Lower interest rates – Conforming loans often have interest rates about 0.25-0.5% or more below jumbos.

• Lower mortgage insurance – Private mortgage insurance (PMI) on conforming loans typically costs less than on jumbos.

• More flexible borrowing – Conforming loans allow for higher debt-to-income ratios than many jumbo loans.

• Larger pool of lenders – More lenders offer conforming loans than jumbos.

High-Balance vs Standard Conforming Loans

It’s important to understand Fannie Mae has two tiers for conforming loans:

• Standard – Up to the baseline loan limit ($726,200 for 2023).

• High-balance – Above the baseline limit up to the high-cost area maximum ($1,089,300 for 2023).

While high-balance conforming loans offer lower rates than jumbos, they do come with some additional requirements compared to standard conforming mortgages under the baseline limit. These include:

• At least 10% down payment for fixed-rate loans.

• Minimum 620 credit score.

• Lower maximum debt-to-income ratio (DTI) of 45%.

• No expanded DTI allowances for certain credit factors.

• Reduced number of condo projects eligible.

So in high-cost areas, buyers who can keep their loan under the baseline limit will have an easier time meeting conforming requirements than those needing a high-balance loan.

Conforming Loan Limits Over Time

Looking at changes to conforming loan limits over the years shows just how significantly Fannie Mae’s role in the mortgage market has grown.

• In 2007, near the start of the housing crisis, the U.S. conforming limit was just $417,000.

• It was increased substantially over the next few years to revive lending.

• The Housing and Economic Recovery Act of 2008 raised limits for high-cost areas to as high as $729,750.

• The limit finally returned to lower levels after the market recovered, hitting $453,100 in 2015.

• Strong home price growth in recent years has pushed conforming limits to new highs.

• The new $726,200 limit for 2023 is over 75% higher than just 8 years ago in 2015.

Rising limits indicate Fannie Mae’s conforming loans are financing increasingly expensive homes, even in lower-cost markets. This expands their impact in supporting broader homeownership.

The Takeaway

Fannie Mae’s increased conforming loan limits for 2023 provide welcome breathing room for homebuyers in an expensive housing market. The higher limits allow more borrowers to obtain lower rate mortgages with less onerous requirements. This increases purchasing power and flexibility. While still restrictive compared to jumbos, conforming loans open homeownership to a wider range of buyers. So Fannie Mae’s growing role has been crucial in promoting affordable and accessible mortgage financing.