What are conforming loan limits, and why are they increasing?

November 30, 2022

Expert insights on how loan limits affect the housing market and why they changed for 2023.

 

Prospective homebuyers in 2022 faced another challenging year of increasing home prices, rising mortgage rates and decreasing inventory. If you’ve been paying attention to the real estate market, you’ve probably heard about the recent adjustment to conforming loan limits. U.S. Bank financial industry and regulatory affairs expert Robert Schell offers perspective on why this occurred. Read on to learn what conforming loan limits are and how they impact the housing market.

 

Conventional versus jumbo mortgages

Conforming loan limits, at their core, are used to separate conventional loans from jumbo loans.  Fannie Mae and Freddie Mac, sometimes referred to as government sponsored enterprises (GSEs), set requirements like down payments, minimum credit scores and documentation for mortgages they purchase. Additionally, the Federal Housing Finance Agency (FHFA), which regulates the GSEs, sets guidelines on maximum loan sizes (i.e., conforming loan limits) that qualify for purchase by Fannie Mae and Freddie Mac, helping them manage their risk when purchasing conventional mortgages from lenders.

Jumbo loans are mortgages that exceed these conforming loan limits. Unlike conventional mortgages, jumbo loans cannot be purchased by Fannie Mae and Freddie Mac. Instead, they generally must be maintained by the lender for the entire life of the loan. This puts increased risk on lenders and drives up interest rates for homebuyers.

 

Supporting homebuyers through the secondary mortgage market

Conventional mortgages are designed to benefit the average homebuyer, ensuring that the housing market is affordable for most people. Fannie Mae and Freddie Mac help make this possible by purchasing conventional mortgages from lenders. When a buyer takes out a home loan, lenders can sell the mortgage to Fannie Mae and Freddie Mac, who bundle numerous mortgages together to create securities. These securities are later sold on the secondary market.

Robert explains the process: “The GSEs take individual mortgage loans, buy them from lenders and then pool them – or package them together – into securities. There might be one security that has a thousand mortgages from all different parts of the country. Those thousand mortgages are sliced and diced into different tranches of risk that investors might want to buy.”

When Fannie Mae and Freddie Mac buy a mortgage from a lender, they assume the associated risk and spread it between investors. If a homeowner defaults on their mortgage, the impact for lenders is significantly minimized because they've already sold off the mortgage to Fannie Mae and Freddie Mac. In turn, lenders are more likely to reduce interest rates.

Investors purchasing mortgage-backed securities benefit from the pooling together and repackaging of mortgages while also being guaranteed against the risk of homeowner default by Fannie Mae and Freddie Mac. Meanwhile, the GSEs benefit from the scale and diversification that makes the impact of a single mortgage default like a drop in the bucket compared to the more than $6 trillion of combined mortgage portfolios between both companies.

“By pooling risk and selling securities to investors, GSEs help make mortgages more accessible and affordable for borrowers,” Robert explains. “And they pull in additional investment money into the mortgage market, which helps make that happen.”

 

Loan limits increase for 2023

Every November, the FHFA adjusts the conforming loan limits to reflect changes in the housing market. This helps ensure the average homebuyer can still get a conventional mortgage, even as housing costs rise. The FHFA recently announced that the baseline conforming loan limit for 2023 will increase 12.2% to $726,200, with the limits 50% higher in designated high-cost areas. That’s a smaller increase than last year’s 18% year-over-year increase, which was more than double the 2021 conforming loan limit.

“When the FHFA does this, they’re just following a formula; they’re not making any judgment calls,” says Robert. “They’re looking at what home price data is saying and how it’s increasing from last year to this year. The 12.2% increase is consistent with what the data says.”

But what made housing prices rise so sharply in 2020, 2021 and the first part of 2022? It comes down to supply and demand. The housing market has a limited supply of houses, and, at least anecdotally, geographic mobility sharply increased in the last two years, causing both more buying and selling around the country. Global supply chain issues delaying new home construction and mortgage rates that had previously been at record lows increased affordability and competition for houses through early 2022. “We’re seeing the same effects; it’s just the third year of them and they’ve only started to reverse,” Robert says.

 

FHA loan limits

As another key player in the housing market, the Federal Housing Administration (FHA) is required by statute to follow the example of the FHFA when setting loan limits for low-income and first-time homebuyers. Not surprisingly, they announced similar adjustments to their maximum loan limits this November.

 

Looking forward

The increase in loan limits this year follows the overall trajectory of housing prices, which continued to increase substantially in the first half of the year but began to cool off – and, in some cases, reverse – in the second half. Mortgage rates rose to 20-year high interest costs for conventional 30-year mortgages. This, in turn, increased the likelihood of pricing some homebuyers out of the market, especially with the rapid rise in home prices over the past two years. Overall home sales volume fell nearly every month since February 2022. Price appreciation peaked nationally, in March, at almost 21% but pulled back to just 10.6% in September. The average price increases of 12.2% from 2021 fit with this story.

 

Get more insights from a U.S. Bank mortgage loan officer about changes in the housing market.

Related content

Building a dream home that fits your life

Practical money skills and financial tips for college students

Beyond Mars, AeroVironment’s earthly expansion fueled by U.S. Bank

Prioritizing payroll during the COVID-19 pandemic

Middle-market direct lending: Obstacles and opportunities

6 questions to ask before buying a new home

What you should know about buying a car

Your financial aid guide: What are your options?

How to get started creating your business plan

Webinar: Mortgage basics: How much house can you afford?

Starting your homebuying journey: Tips from a U.S. Bank Goals Coach

These small home improvement projects offer big returns on investment

What you need to know about renting

What is a home equity line of credit (HELOC) and what can it be used for?

Is it the right time to refinance your mortgage?

9 simple ways to save

5 things to avoid that can devalue your home

At your service: Outsourcing loan agency work

Managing the impacts of appraisal gaps in a hot housing market

Military homeownership: Your guide to resources, financing and more

Is it cheaper to build or buy a house

What are conforming loan limits and why are they increasing

Bringing economic opportunity to underserved communities one home at a time

How I did it: My house remodel

How do I prequalify for a mortgage?

8 steps to take before you buy a home

Your guide to breaking the rental cycle

4 ways to free up your budget (and your life) with a smaller home

Get more home for your money with these tips

First-time homebuyer’s guide to getting a mortgage

Tailor Ridge eBill case study

Home buying myths: Realities of owning a home

5 tips to help you land a small business loan

How I did it: Turned my side hustle into a full-time job

Money Moments: How to finance a home addition

Common unexpected expenses and three ways to pay for them

Is it time to get a shared bank account with your partner?

Community activist achieves dream of homeownership

For today's homebuyers, time and money are everything

Here’s how to create a budget for yourself

How to use debt to build wealth

4 benefits of independent loan agents

Housing market trends and relocation impact

High-cost housing and down payment options in relocation

For today's relocating home buyers, time and money are everything

Crypto + Relo: Mobility industry impacts

How I did it: Deciding whether to buy an RV

Take the stress out of buying your teen a car

Streamline operations with all-in-one small business financial support

Checklist: financial recovery after a natural disaster

Personal loans first-timer's guide: 7 questions to ask

Dear Money Mentor: When should I refinance a mortgage?

How I did it: Bought a home without a 20 percent down payment

House Hacks: How buying an investment property worked as my first home

The lowdown on 6 myths about buying a home

Multiple accounts can make it easier to follow a monthly budget

Evaluating interest rate risk creating risk management strategy

You can take these 18 budgeting tips straight to the bank

Opening a business on a budget during COVID-19

How I did it: Learned to budget as a single mom

What’s a subordination agreement, and why does it matter?

What is an escrow account? Do I have one?

Understanding the true cost of borrowing: What is amortization, and why does it matter?

Money Moments: Tips for selling your home

Parent checklist: Preparing for college

Which is better: Combining bank accounts before marriage — or after?

Don’t underestimate the importance of balancing your checking account

Do you and your fiancé have compatible financial goals?

Should you get a home equity loan or a home equity line of credit?

Quiz: How prepared are you to buy a home?

How to establish your business credit score

What is a CLO?

Checklist: 10 questions to ask your home inspector

When to consider switching banks for your business

7 steps: How couples and single parents can prepare for child care costs

Adulting 101: How to make a budget plan

How to save for a wedding

It's possible: 7 tips for breaking the spending cycle

Personal finance for teens can empower your child

Save time and money with automatic bill pay

How I did it: Bought my dream home using equity

Buying a home Q&A: What made three homeowners fall in love with their new home

How I did it: Built living spaces to support my family

Spring cleaning checklist for your home: 5 budget-boosting tasks

Saving for a down payment: Where should I keep my money?

Checklist: 6 to-dos for after a move

Webinar: Uncover the cost: Building a home

Are professional movers worth the cost?

10 questions to ask when hiring a contractor

How you can take advantage of low mortgage rates

4 questions to ask before you buy an investment property

10 ways to increase your home’s curb appeal

Webinar: Uncover the cost: Home renovation

Is a home equity line of credit (HELOC) right for you?

10 uses for a home equity loan

Preparing for homeownership: A guide for LGBTQ+ homebuyers

Beyond the mortgage: Other costs for homeowners

How to use your home equity to finance home improvements

What to know when buying a home with your significant other

Webinar: Mortgage basics: What’s the difference between interest rate and annual percentage rate?

Webinar: Mortgage basics: Buying or renting – What’s right for you?

Webinar: Mortgage basics: What is refinancing, and is it right for you?

Webinar: Mortgage basics: Prequalification or pre-approval – What do I need?

Webinar: Mortgage basics: How does your credit score impact the homebuying experience?

Webinar: Mortgage basics: Finding the right home loan for you

Webinar: Mortgage basics: 3 Key steps in the homebuying process

What is refinancing a mortgage?

Home equity: Small ways to improve the value of your home

Closing on a house checklist for buyers

How to prepare for a natural disaster

Student checklist: Preparing for college

Webinar: Uncover the cost: College diploma

The A to Z’s of college loan terms

Co-signing 101: Applying for a loan with co-borrower

How I did it: Paid off student loans

5 tips for seniors to stay a step ahead of schemers

Recognize. React. Report. Caregivers can help protect against financial exploitation

Is online banking safe?

Identity stolen? 5 steps to take immediately

Everything you need to know about consolidating debts

Know your debt-to-income ratio

Your quick guide to loans and obtaining credit

Test your loan savvy

Is a home equity loan for college the right choice for your student

How to apply for federal student aid through the FAFSA

Be careful when taking out student loans

ABL mythbusters: The truth about asset-based lending

Collateral options for ABL: What’s eligible, what’s not?

Crypto + Homebuying: Impacts on the real estate market

Webinar: Buying a home in 2022: what to expect

How jumbo loans can help home buyers and your builder business

When small companies buy big: The potential of asset-based lending

How to maximise your infrastructure finance project

Questions to ask before buying a car

How to choose the best car loan for you

What you need to know before buying a new or used car

Can you take advantage of the dead equity in your home?

How to fund your business without using 401(k) savings

Costs to consider when starting a business

How a small business is moving forward during COVID-19

Investing in capital expenditures: What to discuss with key partners

Can ABL options fuel your business — and keep it running?

Tech lifecycle refresh: A tale of two philosophies

Maximizing your infrastructure finance project with a full suite trustee and agent

An investor’s guide to marketplace lending

Should you buy a house that’s still under construction?

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, home equity and credit products are offered by U.S. Bank National Association. Deposit products are offered by U.S. Bank National Association. Member FDIC.