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New Conforming Loan Limits for 2023 [What it Means for Home Buyers]
A conforming loan is a mortgage that meets the guidelines set by the FHFA, in accordance with Fannie Mae and Freddie Mac. Two sectors within the mortgage industry are primary lenders (originators) and the secondary market. The secondary market may purchase your mortgage from the originator and retain the rights to service the loan. This is where the conforming loan limits come into play. In short, the secondary market typically only purchases loans within these guidelines (aka "conform" to the guidelines).
Therefore, originators that plan to sell their loans to the secondary market must make sure they meet the secondary market standards. Conforming loans have less strict standards than other loans, such a jumbo loans, and are beneficial to most home buyers.
Key benefits for consumers:
- Uniform standards for qualification
- Lower down payment requirements
- Lower interest rates
- More favorable loan options
FHFA and the Department of Housing and Urban Development (HUD) announced via press release the new conforming loan limits for 2023. The new conforming loan limit is $726,200, which is a $79,000 increase from last year's limit of $647,200. In addition, the "conforming loan floor and ceiling increased to $472,030 and $1,089,300, respectively, for calendar year 2023." In areas considered low cost, the "floor" figure derives from 65% of the national conforming loan limit. In contrast, the ceiling for high cost areas is 150% of $762,200 conforming loan limit. Detailed information about the new guidelines can be found on the HUD website.
What This Means For Borrowers
In short, more buyers have access to qualify for financing on more houses. “The increase in loan limits, commensurate with the increase in home prices, will allow qualified individuals and families to continue to access FHA-insured mortgages to achieve affordable home financing,” said Principal Deputy Assistant Secretary for Housing and FHA Lopa Kolluri. They still have to meet all of the benchmarks in place to receive the loan. For example, FHA loans require a 3.5% down payment, credit score above 580, and a 43% debt to income ratio (DTI). To put this into context, under the new limit, a home buyer can purchase a property using a conforming loan up to $472,030 in a low cost area. Under the FHA requirements they would need at least a 580 credit score, down payment of at least $16,521.05, and a monthly DTI less than 43%. An individual lender may have additional requirements, but these are the baseline standards for a conforming loan.
The increased limits are more inclusive for borrowers looking for a home on the higher end. The most common alternative for a home valued above the conforming loan limit is a jumbo loan. Some buyers view this as less than ideal because it would typically require a larger down payment. Going back to the previous example, a $472,030 home wouldn't have qualified for a conforming loan last year. The buyer would need a jumbo loan, which may require up to a 20% down payment, or $94,406. That's a substantial leap from the 3.5% down payment of $16,521.05. Buyers on that higher end can get a lot more house for a much more reasonable down payment.
In addition, more buyers can enjoy a lower interest rate by avoiding a jumbo loan. Since jumbo loans are not federally insured, they carry more risk for the lender. As a result, the lender might ask for a higher interest rate to issue a jumbo mortgage. With a higher conforming loan ceiling, more buyers will qualify for a conforming loan and avoid high-risk mortgages.
More Resources for Conforming Loan Limits
Every year, HUD issues a Mortgagee Letter which breaks down Nationwide Forward Mortgage Limit. They also offer resources for home buyers, which lenders can pass along to their customers. It walks you through the home buying process and has information for each stage, from financing to closing.
Is now a good time to buy a home? [Answering common home buyer questions.]
Uncertainty can be a scary feeling, especially when it comes to finances. Homeownership is one of the most rewarding yet challenging endeavors in your life. Considering that purchasing a home may be the largest financial decision you'll make, it's understandable that you might be hesitant during a time when many knowledgeable professionals are giving mixed signals about the housing market.
We'll talk about what experts are saying about the current market, and some important housing topics to consider regardless of the market. If you're on the fence about buying a home, hopefully this offers some encouragement during a time of hesitancy. At the very least, I hope it can help to answer some of the pressing questions surrounding the current real estate market.
Are the big, scary mortgage rates too high?
This is the hottest topic in the industry in the past 6 months. I enjoy listening to podcasts and YouTube videos to stay current on industry trends. You can't listen to a real estate or mortgage podcast for 10 minutes without hearing about how the real estate industry is "red-hot" and listings are selling in extremely quick for over asking price. The combination of low mortgage rates and low inventory has caused the hot market.
You may have heard about how the federal reserve (commonly known as The Fed) is rising interest rates in an attempt to cool down the market. Two things will help calm the market. Increased inventory (supply) of houses or higher prices that buyers are unwilling or unable to pay (demand). The easiest way for The Fed to impact the market is by adjusting the federal funds rate. Bankrate describes this as the, "interest rate at which banks and other depository institutions lend money to each other." For home buyers, this makes it more expensive to borrow money. In theory, less people will be interested in buying as the rate to borrow becomes more expensive.
Consumers are seeing the rising mortgage rates, which begs the question: are mortgage rates too high? The short answer is "it depends." I know what you're thinking. What a diplomatic, cowardly answer! However, perspective is key here. Are you asking if mortgage rates are too high to buy right now, or are they high compared to similar historic periods? You will get a completely different answer depending on the basis for your question.
Dating back to 1970, mortgage lenders were charging as high as 17 percent interest. This consistently declined to 8 percent by 2000, and reached an all-time low in 2021 by averaging below 3 percent according to Freddie Mac. Someone who has been in the industry for a while will suggest that current interest hovering around 5 percent is still extremely low. Of course, 2% over 30 years can amount to a significant chunk of cash. There is no doubt that borrowers from 2 years ago got a fantastic rate.
If 5% is too high for your comfortability level, you might be waiting years before if it comes back down to the historic lows. One way to counter the higher rates is by refinancing. After a few years of paying down the loan, either rates will come down, or at the very least you will have some equity built up. You can renegotiate a lower rate, or get a shorter loan to accumulate less interest.
The bottom line: for those who are considering buying in the near future, it's still a good time to buy. Rates are historically low, and they will likely continue to rise until the market is balanced. Planning to wait it out might cost you valuable years of building equity and living in your own house. Ultimately, everyone's financial situation is different. It's always smart to speak with an expert before making any decisions about applying for a mortgage.
Why is now a good time to buy? [Pros and cons of the current market]
The previous section talked about the slight increase in mortgage rates, while they are still historically low. Some buyers have been priced out of the market, or will need to save up a bit more money to afford the higher rates. In order to make the big decision to buy, the benefits must outweigh the downside of a slightly higher rate.
A fixed-rate mortgage allows you to lock in your rate. Generally, this is common knowledge, but it is even more crucial in an unpredictable market that some would argue is happening today. The Fed has stated that they will continue to gradually increase the federal fund rate until the market is more balanced. Locking in your rate protects you from the volatility that might occur once the market reaches a breaking point. The discouraging outcome that you want to avoid is buying at the peak price for a high interest rate. You could get stuck with an overpriced home, at a high interest rate. Refinancing would be much more difficult, or even impossible, if you made that mistake.
Luckily, the market is still predicted to climb, as demand hasn't slowed much and inventory is low. With the rising interest rates, some buyers have chosen to wait and see if they will go back down. This means less competition for those that choose to stay in the game. As a result, home prices are starting to sell at more reasonable prices. It's too soon to tell if this means the market is slowing. Houses are still selling at record prices and with multiple offers. Simply, it is starting to trend in the right direction for buyers, and sellers are having to negotiate a bit more than the last few years.
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Choosing Your Home & Closing the Deal
Here are some more quick tips to prepare for buying a home. Whether you're a first-time home buyer or a seasoned homeowner, it's always good to check all of these boxes before taking the leap. Buying a home is a huge decision, and we're happy to be right along your side for the whole journey. Check out some basic tricks that will make you more prepared when it's time for the big moment.
What to Look For in a Home
The first step is deciding which location best suits your needs. You should look at the neighborhood, shopping in the surrounding area, distance from work, etc. If you have kids, it's also important to look at the school districts and the quality ratings that go along with them.
As far as the house itself, think about your needs. Do you want a guest bedroom? Do you work from home and require a designated office space? Would you like to have a finished basement for entertaining or a kids playroom? All of these questions will help you determine how many bedrooms and bathrooms you require. Taking a look at the condition of the home's electrical and plumbing is also a good idea.
House Hunting Tips
It is good to start touring homes once you've come up with your list of requirements and created a wants and needs category. In order to do this, think about each requirement and ask yourself if the house was amazing in every other way, would I compromise on this? If the answer is yes, it's a want. If the answer is no, it's a need.
Ready for a Real Estate Agent
The next step is finding a real estate agent. HomeTraq makes it easy for you to tour properties you love and find the right real estate agent for you, without pressure to commit right away. If you find a place you want to tour, click here and type in the address. Soon, a real estate agent in the area will accept your tour request and meet you at the home. Once the tour is over, you are able to continue with that agent or find a new one by following the same process.
A real estate agent will be able to provide all of the up-to-date information about the area, school systems, tax rates, water and sewer charges, or anything else that will go into your decision on a home.
Making an Offer
Once you have found the perfect home, it's time to make an offer. The first step will be meeting with your real estate agent, as well as an attorney, to fill out the Offer to Purchase form. This varies state by state and can be complicated, so it's best to fill it out with parties that thoroughly understand the form. You will then determine how much you're willing to pay for the house, keeping in mind factors like how much you can afford, how many other buyers there are, and how badly you want the home.
It is advised that you include a contingency of offer depending on the results of the home inspection. This inspection is done by a professional, third-party company and is usually the responsibility of the buyer. This inspection should cover all central heating/cooling systems, insulation, structural components (interior walls, roof), and the foundation of the home. You most definitely can (and should) be present when the home inspection is being done so you can ask any questions and review what is being inspected.
Finally, you'll make a deposit called "earnest money" to your real estate agent to go along with your offer. This shows that you are serious about the offer. If the sale goes through, that money will be deducted from the money owed at closing. If the seller rejects your offer, that money will be returned. Once your offer is made, the seller may make a counteroffer. From there, you have the option of accepting, rejecting, or making another counteroffer. That process goes on until an offer is accepted!