Mortgage giants Fannie Mae and Freddie Mac will raise government-backed lending limits to record levels for 2023, with the maximum borrowing limit for high-cost areas reaching more than $1 million, the Federal Housing Finance Agency announced on Tuesday.
Even as the housing market has cooled off this year amid soaring mortgage rates, home prices are still rising, with prices up 12.21% year over year in the third quarter, according to the FHFA.
As a result, the compliant base loan limit for 2023 will be $726,200, $79,000 more than this year’s limit of $647,200. Higher cost areas have a new loan limit of $1,089,300 or up to 150% of the base loan limit. This year, the credit limit for high-cost areas is $970,800.
Mortgages that exceed these loan limits are considered “non-compliant” or “jumbo” mortgages and typically carry higher interest rates.
Next year’s hikes aren’t as big as those for 2022. That’s largely due to the slowdown in house price growth. The increase for 2022, up $98,950 from $548,250 in 2021, was the largest percentage increase and dollar increase since 1980.
“US home price growth has slowed significantly,” said William Doerner, an economist in the FHFA’s Division of Research and Statistics. “This slowdown is widespread, with about a third of all states and statistical metro areas experiencing less than 10% annual growth.”
The increase is welcome news for homebuyers, especially those in high-price areas who have been pushed into pricier jumbo mortgages for even a modest home.
“These new, much higher numbers will allow more homebuyers to take advantage of Fannie Mae and Freddie Mac financing,” said Melissa Cohn, regional vice president at William Raveis Mortgage.
But not everyone in the housing industry agrees that extended limits are a good idea.
The Housing Policy Council, a trade association of mortgage lenders and servicers, insurers, and tech and data companies, argues that higher credit limits may worsen the affordability crisis. With house prices rising much faster than household income, taxpayer support for larger loans provides a subsidy that results in slightly lower mortgage rates, which in turn encourages people to buy more expensive homes.
“Ultimately, such support feeds the rise in property prices and exacerbates the affordability challenges we face in today’s supply-constrained market,” the HPC said in a statement.
Fannie Mae and Freddie Mac secure about half of all US mortgages, but they’re not lenders. Instead, Freddie and Fannie buy loans from lenders and sell them to investors. This makes these loans cheaper for lenders and keeps loans available and relatively affordable for consumers, among other benefits.
The base loan limit is the maximum loan amount—not the purchase price—to purchase a unit.
By categorizing higher-quality loans as compliant, more homebuyers can qualify for loans, which are typically less expensive, require lower down payments, and allow for lower credit scores. Jumbo loans are more expensive and harder to qualify for because of the higher risk.
The FHFA’s formula for increasing limits each year takes into account how much home prices have risen over the year. The law sets the maximum loan limit in high-expense areas as a multiple of the area’s median home value, up to a maximum of 150% of the base loan limit.
High cost cities include areas such as San Francisco and Silicon Valley, as well as New York City and Washington, DC and the surrounding city suburbs.
It is FHFA policy not to decrease credit limits. When house prices fall, credit limits remain the same as last year until the house price decline has been “recovered”. For example, after the housing crisis, the basic credit limit did not change in 2007 and stayed at the same level until 2017, when it increased again.