The latest baseline increase in conforming loan limits has enabled loan originator Dave Krichmar’s client to make a 5% down payment instead of 10%.
The self-employed homebuyer found an $800,000 home in Texas, but with the conforming loan limit for 2023 being $726,200, the buyer needed a jumbo loan or a bank statement loan. Those loan types would require a larger down payment of at least 10% of the home’s value, or $80,000, which would stretch his budget too thin.
“With the latest Federal Housing Finance Agency (FHFA) announcement, he could qualify for a conforming loan paying a 5% down payment of roughly $40,000 rather than $80,000 – which could have put him on the sideline. Now he is off the sideline because a 5% down payment is completely doable,” said Krichmar, a mortgage banker at Legend Lending Corporation.
Based on annual changes to an index of national home prices, conforming loan limits for mortgages backed by Fannie Mae and Freddie Mac on one-unit properties will be $766,550 in 2024. For high-cost areas, the loan limit is $1.149 million.
Rising home prices also prompted the Federal Housing Administration (FHA) to adjust its loan limits — with the “floor” FHA loan limit for one-unit properties increasing to $498,257 in most parts of the country.
The increases in conforming and FHA loan limits will help certain homebuyers, including younger buyers with little cash saved and a small window of borrowers who were on the cusp of not being able to apply for an FHA or conventional loan due to lower floor FHA loan limits or baseline conforming loan limits.
“By increasing the maximum loan amount, the change means that more borrowers will be able to get conforming loans instead of jumbo mortgages, which often are harder to qualify for. It might open the door for homeownership just a touch wider for a few buyers who would have had trouble securing jumbo loans,” said Holden Lewis, a home expert at NerdWallet.
Who benefits from higher loan limits?
The latest increases in the FHA loan limits will move the needle a little bit, noted John Palmiotto, chief production officer at The Money Store.
“It can squeeze them into maybe a better property than they previously could [afford] so there’s a bit of an opportunity there,” Palmiotto said.
Amid a high interest-rate environment, FHA loans have become a popular option for borrowers who have lower FICO scores or need to qualify with a slightly higher debt-to-income (DTI) ratio.
Mandatory mortgage insurance premiums were reduced to 55 basis points (bps) for most borrowers in February, and FHA loans tend to come with lower interest rates than conventional loans while the difference in interest rates could often be offset by the greater number of fees — including the MIP charges
Demand for FHA loans has risen over the past year to comprise 26.3% of all new-home purchase applications in October 2023, the highest share of FHA new-home purchase applications made in a decade, according to the Mortgage Bankers Association (MBA).
Millennial homebuyers — about 28% of all buyers — who don’t have as much cash saved to be able to buy at a higher price point will benefit most from higher FHA loan limits.
“They will be more comfortable than the baby boomer generation taking out a larger mortgage to get what they want. They’ve seen massive real estate appreciation; they’ve seen it as a great investment vehicle,” Palmiotto noted.
The increase in conforming loan limits are also expected to help some borrowers who would have otherwise needed a jumbo mortgage.
“A lot of people shop for homes based on a price range. So they’re able to just push a little bit further towards what they want, which may be doable,” Krichmar said.
“I’m in the San Francisco/San Jose/Oakland area in California, so we have the high balance conforming loan limit as well, which is going up to $1.149 million. For sure, that will help a lot of people who might not be qualified for [a] jumbo [loan]. Some people don’t have the ability to put up to 20% down,” said Brady Thomas, branch manager at American Pacific Mortgage.
How higher loan limits might move the housing market needle
Economists at Fannie Mae project home prices to increase by 2.8% on an annual basis in 2024. Meanwhile, economists at Capital Economics are expecting an annual increase of only 1.5% next year.
The MBA has a more optimistic view on home prices, expecting a 4.1% increase.
The FHFA’s increase for conforming loan limits in 2024 follows a formula that tracks increases in national home prices. The FHFA cited an average 5.56% increase in home prices across the country from the third quarter of 2022 to the third quarter of 2023.
But 2024’s higher conforming loan limits should enable more homebuyers to take advantage of conventional financing in 2024, noted Peter Idziak, senior associate of residential mortgage law firm Polunsky Beitel Green.
“I expect the increase in conforming loan limits will provide support for continued appreciation in home prices as more potential homebuyers are able to take advantage of federally-backed financing. In non-high cost areas, this support should be especially evident in the $725,000 to $955,000 price range, which roughly corresponds to the 95% to 80% [loan-to-value (LTV)] ratios based on the new limits,” Idziak said.
However, loan originators and housing professionals are skeptical the new changes will move the needle much to resolve widespread affordability issues.
“It’s not a big enough movement that it’ll draw that amount of attention. What price range is it affecting? It’s only affecting someone who was wanting to buy an $800,000 home but could only buy a home of $750,000. That’s a small window. For somebody who’s buying a $1 million home and $600,000 home, it’s not making a drastic change,” Krichmar said.
It’ll help around the edges, allowing people to buy at lower down payment amounts who normally wouldn’t be able to with a down payment for jumbo loans of at least 10% and as much as 20% of the home’s purchase price.
The heightened limits enable a larger pool of prospective homebuyers to secure financing with more favorable terms, which could potentially sustain housing demand and market activity, said Orphe Divounguy, senior macroeconomist at Zillow Home Loans.
“Nevertheless, the overall impact remains contingent on various economic factors, interest rate trends and localized housing dynamics.” Divounguy added.
For affordability to improve and homeownership to expand, mortgage rates will have to come down. Current high rates are creating an inventory lock-in effect because sellers with existing low-rate mortgages don’t want to give those loans up for a much higher rate on another property.
“I think rates will have a big impact because, one, they affect buyer affordability, and two, they affect inventory. So I don’t think that the increase that FHFA announced […] is going to have a huge impact because it was already expected and kind of part of [how] our market works,” Thomas said.