When it comes to getting a mortgage, there is a limit to how much buyers can borrow. However, did you know that these same limits can actually work in favor of sellers?
At an industry level, lenders are limited by how much they can lend to borrowers if they want their loans to conform to the standards set forth by the Federal Housing Finance Agency (FHFA). Conventional loans that meet these standards are called conforming loans
The FHFA has announced its conforming loan limits for 2023, and it's great news for sellers!
Spoiler alert: Buyers' purchasing power is increasing, which means that sellers can potentially sell their homes for higher prices.
What Is The Conforming Loan Limit?
The FHFA sets conforming loan limits for Fannie Mae and Freddie Mac, the two government-sponsored enterprises that it regulates.
Fannie Mae and Freddie Mac purchase mortgages that meet their standards from lenders and then repackage them into mortgage-backed securities for investors. This process gives lenders the liquidity needed to continue providing borrowers with affordable mortgage loans.
Both Fannie Mae and Freddie Mac have additional criteria for the loans they purchase, including minimum credit scores, minimum down payments, and maximum debt-to-income ratios (DTI). But in general, when people talk about conforming loan standards, they’re talking about loan limits.
So, what exactly are these limits?
The baseline conforming loan limit for 2023 is $726,200 – up from $647,200 in 2022. The limit is higher in Alaska and Hawaii, where the number is $1,089,300 for a 1-unit property. Also, the mortgage borrowing limit is $1,089,300 for a single-family home in the Washington, DC metro area.
If buyers need a home loan that exceeds the conforming loan limit for their area, they'll have to get a jumbo loan, which allows higher loan limits. However, these loans are typically harder to qualify for, requiring higher credit scores and larger down payments. This can mean that buyers who are unable to qualify for jumbo loans may look to purchase homes below the conforming loan limits, driving up demand and potentially prices.
Below are the gathered FHA and conforming mortgage limits for the DMV. As you'll see, the Washington metro area’s conforming loan limit is just shy of $1.1M for 2023.
How The Conforming Loan Limits Work In 2023
Conforming loan limits are tied to home prices. Each year, the FHFA updates its baseline loan limit based on its House Price Index (HPI) report, which tracks the average increase in home values over the previous year.
The new loan limits are calculated each year based on third-quarter data from the FHFA HPI. In 2022, the loan limit increase was 18.05%.
Conforming loans are great for sellers because they can potentially sell their homes for higher prices, especially if they are in high-cost areas that allow for higher loan limits. These higher prices can help sellers maximize their profits and make a higher return on investment.
Conforming Loan Limits In High-Cost Areas
Home prices vary quite a bit from state to state, and even from county to county. This makes having a single conforming loan limit for the entire country difficult – after all, it’s hard to compare home prices in rural Ohio to home prices in Manhattan, one of the most expensive real estate markets in the country.
This is why the FHFA has a higher limit for areas it deems to be “high-cost,” a designation based on an area’s median home values compared to the baseline conforming loan limit.
Washington, DC has a higher borrowing limit since it's more costly than other areas in the US. If you're comparing homes in Washington, DC to homes in a nearby state, check the mortgage borrowing limit for that county to make sure you're not comparing apples to oranges. The type of mortgage you may get might be different for certain counties if the mortgage borrowing limit is lower.
Let's say you're planning to buy a home for around $700,000 and need a loan of $650,000 or more. In Anne Arundel County, Maryland, the FHA mortgage limit is $632,500, and the conforming mortgage limit is $726,200. This means you'll only have the option to apply for a jumbo loan. Meanwhile, in Washington, DC, you'll still be eligible for an FHA mortgage or conforming mortgage.
The exact conforming loan limit varies depending on the median home value in a given area, up to 150% of the baseline conforming loan limit. To see what the current limit is in your county, use the FHFA’s interactive map.
What To Consider Before Selling A Home Above The Conforming Loan Limit
If you’re considering selling a home above the conforming loan limits, there are certain things to take into account to ensure that buyers can afford to purchase your home. Even with higher loan limits, buyers may still struggle to afford homes in high-cost areas.
In San Francisco, for example, the maximum conforming loan limit is $1,089,300, but the median list price is nearly $1.2 million as of this writing (September 2022). High prices like this can make it difficult for sellers to find buyers who can afford their homes without having to get a jumbo loan.
However, with higher conforming loan limits, buyers may be able to put down lower down payments, making it easier for them to purchase your home. Sellers should also keep in mind that potential buyers who are unable to secure a conforming loan may be more willing to pay more for homes that are just below the conforming loan limits.
The Bottom Line: Conforming Loan Limits Can Benefit Sellers
If you're planning on selling your home and are in a high-cost area, it's important to understand what the maximum loan limits are in your county. With potentially higher home prices and increased buying power resulting from higher conforming loan limits, sellers may be able to sell their homes for a higher price point than they would have been able to previously.