The Conforming Loan Limit is Increasing in 2023 - Reason To Celebrate? Think Again.

The Federal Housing Finance Agency (FHFA) recently announced they are again increasing the conforming loan limit starting in 2023. This means more consumers will be able to achieve more lenient financing and be able to purchase more expensive homes. This was almost universally celebrated by many real estate agents and loan officers.

Social media has been abuzz with congratulatory posts on the topic. While I am sure this will be a benefit to many, there are two reasons this may not be such a great thing for consumers.

• First, it will allow many consumers to put themselves in a precarious financial position that they wouldn’t have been able to last year.

• Second, many homeowners and prospective homeowners will lose access to jumbo mortgage products which often have lower rates.

The standard loan limit is $726,200 for 2023 as stated previously. However, in many high-cost counties (mainly along the coast) the conforming loan limit is higher. For instance, in Los Angeles County that number is now $1,089,300. Loan amounts that are above the standard loan limit but below the high-cost area limit are referred to as High Balance loans in the industry.

It means that a buyer could potentially purchase a home for 1,146,631 with only 5% down.

Why is this not necessarily good news for the consumer?

These loans are promised to be purchased by Fannie Mae or Freddie Mac so long as they meet their guidelines. Their guidelines are looser than a lender who is going to keep a loan on their balance sheet typically is. For instance, someone buying that $1.1m+ home could only have 1 dollar in the bank after closing and potentially have a 49.9% debt-to-income ratio. I am sure there are many times these scenarios have ended up working out in the long run for many families. However, this scenario could prove disastrous for many, especially in an environment where values are potentially decreasing. It typically costs around 5% in commission in order to list your home with a realtor in California. The slightest decrease would effectively put a homeowner who only puts 5% down underwater. Throw in a job loss and…. I think you get the picture.

While I’m all for a free market, the FHFA, Consumer Finance Protection Bureau (CFPB), and other alphabet soup agencies have said they have a mandate of protecting consumers. This latest change in the conforming loan limit could potentially harm to consumers.

It is most common for a jumbo lender (loans not sold to Fannie Mae and Freddie Mac over the conforming loan limit) to require 20% down. This means in order to get a jumbo loan the home price will have to be a minimum of $907,750. Mortgage News Daily currently has the average 30-year fixed jumbo interest rate at 5.5% while the conforming 30-year fixed rate is 6.13% [This is not a quote. This is for illustrative purposes only. This is what they have listed on their website at the time of writing]. Besides missing out on higher rates, sometimes someone who has a unique financial scenario can be approved for a jumbo loan but not a conforming loan.

Given these reasons, maybe it’s premature to pop the champagne to celebrate the conforming loan limit increase!