If you are like most potential homebuyers, you have a budget. It is also likely that budget is partially dictated by your personal finances and your comfort level with debt and partially by the size of the mortgage that a lender is willing to give you for the purchase.
Well, there is some good news. Your home-buying budget may have just gotten a little bigger thanks to recent increases in mortgage loan limits that went into effect in 2023.
Why Do Loan Limits Matter So Much?
Loan limits matter because they set the absolute maximum amount of money that you can borrow through a particular type of mortgage loan. If you want to buy a home that costs more than the lender is willing to loan you, you may not be able to obtain financing for the entire purchase price. That could force you to make unpleasant or difficult choices, like:
- You may have to increase your down payment so that you can cover lower the amount you borrow
- You may have to obtain additional financing through a “piggyback” loan, thus increasing your monthly mortgage bills
- You may have to simply bow out of the purchase and let the home go back on the market
Ultimately, loan limits affect not only “how much house” you can afford, but it can affect your ability to live in certain neighborhoods – especially in areas where home prices are soaring.
What Are the New Lending Limits for 2023?
In general, the uptick in housing prices has led to a significant hike in the lending limits. Let’s look at the new limits for the two most common types of mortgage loans:
The Federal Housing Administration (FHA) updates the limits for its loans every January 1. In 2023. These loan limits are related to the conforming (conventional) loan limits set by Freddie Mac and Fannie Mae, and loan limits vary according to both the property type (single units, duplexes and so on) and its location. To learn the current limits in your area, you can check the mortgage limit search engine in the U.S. Department of Housing and Urban Development.
This year, eligible buyers of single-family homes who go through FHA can borrow up to $472,030 in most areas, while those trying to buy in high-cost areas can borrow a max of $1,089.300. Meanwhile, those eligible buyers looking at duplexes can borrow between $604,400 and $1,394,775.
How does this work in practice? Well, let’s say you’re interested in purchasing a home that costs $700,000, and you’re considering an FHA loan. However, the lending limit for FHA loans in your area is $550,000 in 2023. This means that even if you meet all of the eligibility requirements for an FHA loan, you can still only borrow up to the lending limit of $550,000. If you only have a $50,000 down payment, you’d still be short $100,000 of the money you need to seal the deal. That means that you would either have to come up with more money to cover the difference (whether through some personal loans or additional financing) or let the house go to more well-heeled buyers.
Conventional Loan Limits
Conventional loans are what most people think of as “bank” mortgages. Unlike FHA loans, conventional loans are not backed by any government agency. As a result, the lending limits for these loans are set by private lenders and are not subject to government regulations.
However, there is a maximum loan amount that is set by the Federal Housing Finance Agency (FHFA). The baseline limits got a massive 12.21% boost due to inflation, rising from $647,200 in 2022 to $726,200 in 2023 for a single-family home in most areas of the country. (In high-cost areas, that figure is $1,089,300, so you will need to inquire about the specific conforming loan limits in your area of interest to be sure of the exact figures that apply.)
Again, you have the same basic scenario: If you want to buy a home that costs more than you can afford between your downpayment and the conventional loan limit for that location combined, you can’t do it without some extra money from somewhere else. So, if you want a $926,200 home and you have $100,000 for a downpayment, you’d still have to come up with another $100,000 to complete the purchase.
Do These Limits Mean that Is the Amount that You Can Actually Borrow?
Loan limits are just guidelines that can give you an idea about what you might be able to borrow – they’re not a guarantee. The size of the loan you actually qualify for will depend on several factors, including things like your credit score, income, down payment amount and debt-to-income ratio.
The new lending limits are good news for anybody considering buying a home in 2023, but it’s always a good idea to talk to a lender to determine what type of loan is right for you and how much you may be able to really obtain. FHA loans and conventional loans are available to a wide range of homebuyers with varying credit histories and financial pictures. Our mortgage experts can help you learn more about the home loan process and even prequalify you for the mortgage you need to buy the home of your dreams.