I wanted to write a post today with recent news that 2023 Conventional and FHA mortgage loan limits will be increasing significantly over the 2022 limits in the United States. These loan limits are also known as Conforming loan limits. Any loan size above the limits is known as a Jumbo loan. Meaning Fannie Mae and Freddie Mac may only purchase loans that “conform” to the loan limits.
The Federal Housing Finance Agency (FHFA) under the Housing and Economic Recovery Act of 2008 (HERA) uses a formula to calculate the next years Conventional loan limits based on the current year’s third quarter FHFA House Price Index (HPI) for the United States. This calculation is done at the end of each November for mortgage loans that will close beginning the next January 1.
You might be curious if the loan limits can decrease from one year to the next. The answer is no per the HERA legislation rules. If house prices decrease the loan limits will stay the same as the prior year until house price declines have been “made up” and the current index level exceeds the prior FHFA HPI level before the decline started. This occurred when the one unit loan limit was $417,000 in 2006 and stayed there until Jan. 1, 2017 when the HPI showed an increase for third quarter 2016, allowing higher 2017 loan limits. It has continued to increase ever since to this point.
There are several counties that have especially higher loan limits in a number of states due to the formula FHFA uses based on typically higher costs of housing seen in those counties. These counties are usually found in New York, California, Virginia, Colorado and several other states. By definition per HERA, Hawaii, Alaska, Guam, and the U.S. Virgin Islands have higher loan limits as well.
The loan limits adjust higher according to number of units in a property. A single family home or condo or townhouse is known as a one unit. A duplex would be two units, a triplex three units and a quadplex four units. In Chicago, where I’m from, we refer to these often as 2 flats, 3 flats or 4 flats.
Below are the 2023 Conventional loan limits for most counties in the U.S.-
1 Unit $726,200
2 Unit $929,850
3 Unit $1,123,900
4 Unit $1,396,800
If you have read this Blog in the past you know I write about renovation loans and how they can work to add renovation funds into a purchase or refinance mortgage, with approval based on After Renovated Value (ARV). With these 2023 higher conventional loans limits, a door opens to perhaps purchase and rehab a higher cost property or spend more on the rehab.
For example, a 2 unit purchase in Chicago might be $725,000 in some areas. To renovate both units and the basement may cost in excess of $300,000. That’s a total transaction of $1,025,000. The minimum conventional down payment is 15% as owner occupied 2 unit or in this example, $153,750. That leaves a 2 unit mortgage of $871,250. That is $58,600 under the conventional loan limit for a 2 unit of $929,850. So, the higher 2023 Conventional 2 unit loan limit of $929,850 is more than enough.
FHA calculates forward mortgage limits based on the median house prices in accordance with the National Housing Act. These limits are set at or between the low-cost area and high-cost area limits based on the median house prices for the area. As a result, FHA loan limits are not the same as Conventional loan limits in most areas, they are generally lower. But there are higher cost counties in a number of states, much like Conventional loans, that will have higher FHA loan limits than the minimums as below that apply to most counties in the U.S.
Below are the 2023 FHA loan limits for most counties in the U.S.-
1 Unit $472,030
2 Unit $604,400
3 Unit $730,525
4 Unit $907,900
As an example, if purchasing a 4 unit in Chicago for $500,000 and adding $440,000 for a full gut renovation, that total transaction cost is $940,000. FHA 203k renovation loans on a 4 unit require a minimum down payment of 3.50% or $32,900 in this example. That leaves a mortgage of $907,100 which is just $800 under the 2023 FHA 4 unit loan limit of $907,900.
Down payment and terms shown are for informational purposes only and are not intended as an advertisement or commitment to lend. Please contact us for an exact quote and for more information on fees and terms. All loans subject to credit approval. Rates and fees subject to change. Not all borrowers will qualify.