Home prices remained high in 2023, and loan limits continue to keep pace. FHA 2023 conforming loan limits are almost as high as jumbo loans, and this could be the policy for the foreseeable future. After all, home prices don’t seem to be anywhere close to falling soon.
What Are the NEW 2023 FHA Loan Limits?
The Biden Administration recently released the new FHA loan limits for 2023, and HUD kept the maximum loan amounts high. Last year we saw the biggest one-year jump in US history. There was an 18% increase that raised the limits of FHA loans by $148,000. And in more expensive counties and states, the loan limit for FHA mortgages is nearing $1 million. 2023 FHA loan limits have great many opportunities for new home buyers to compete in a competitive housing market.
Who Sets the FHA Maximum Loan Amounts Each Year?
The FHA loan limits for each year are determined by the U.S. Department of Housing and Urban Development (HUD). These maximum loan amounts are set based on various factors, including the median home prices in a particular area. FHA loan limits are established to ensure that the program remains accessible to a wide range of homebuyers by accommodating varying housing markets throughout the United States. The FHA maximum loan amount can differ from one county to another, and they are typically updated annually to reflect changes in housing market conditions and trends. These FHA loan limits play a crucial role in the affordability and accessibility of FHA-backed loans for potential homebuyers in different regions.
FHA Loan Limit Overview
To be approved for this loan, your mortgage needs to be within the maximum amount that FHA will insure. That is where the term ‘FHA loan limits’ comes from.
In 2023, HUD increased the FHA loan limit in 3,188 counties in the US, and 45 counties will have the same maximum FHA loan amount.
FHA has four pricing tiers for its limits: standard, mid-range, high-cost, and special exception. In low-cost areas, the limit is at $420,680 and $970,800 in high-cost areas.
Note that while the loan limit is higher than ever for FHA loans, it’s still lower than the limit for Fannie and Freddie-backed mortgages. The limit for conventional mortgages is $647,200.
So, if you want a more expensive homes, there are situations where you will need a Fannie or Freddie backed loan instead of an FHA home loan. If you cannot qualify for a conventional loan, you may need to get an FHA loan and consider purchasing a less expensive home.
How Does the US Government Set the FHA Loan Limit?
The US government sets the FHA loan limit by reviewing the House Price Index Report. This report looks at average housing prices by each county, compared to prices across the US. This index looks at average price changes in refinancing loans and repeat sales going back more than 40 years.
When sales go up, the Federal Housing Administration increases the loan maximums for the next year so that FHA loans or refinances backed by Fannie Mae and Freddie Mac are competitive and accessible to as many buyers as possible.
2023 FHA Max Loan Amounts
Most of the United States has a conforming loan limit of $420,680 for 2023. This is an 18% jump from this year and is the biggest increase on record. If you reside in an expensive county, the mortgage limit is higher with a ceiling as high as 150% of the baseline.
For example, expensive counties in California, New Jersey, New York, Hawaii and DC will have loan limits of $970,800. You only need a credit score of 580 and a DTI of less than 43% to be considered for an FHA loan with only 3.5% down.
As you can see, it’s quite easy to qualify for an FHA loan, and that is going to make the loan program very attractive going into 2022!
How FHA Loan Limits Affect Borrowers
Housing price increases have led to higher mortgage limits. But will housing prices continue to rise and will the higher loan limit cause them to go up even more? Many experts think the rising loan limit will cause home prices to go higher, which can be challenging for first-time buyers.
One consideration to note is an FHA loan requires you to live in the house, so the new limits don’t affect most real estate investors. But the higher limit may expand the housing market and increase competition, which could boost prices more.
Note that the FHA mortgage limits are maximums and not everyone will get the maximum loan amount. Also, the loan must be able to be paid back, so lenders need to verify that borrowers have the income to support the payments. They also need to check that home buyers can pay for their other obligations, including auto payments, groceries, and utilities among others.
If a home buyer gets the maximum allowed mortgage, they could wind up house poor and unable to pay for other life expenses.
But there is little doubt that the higher 2023 HUD Approved loan limits give people access to plenty of money to borrow. And interest rates are still low, despite the significant rise in inflation we have seen in 2023.
Borrowing Requirements Still Lenient for FHA Loans
Many financial experts think more Americans than ever will apply for FHA loans in 2024. With loan limits so high and prices rising, more Americans will opt for FHA loans because they are relatively easy to get.
FHA financing does not have as difficult requirements in terms of income, credit score, and debt-to-income ratio. The option of making a low-down payment can make FHA loans more desirable for the first-time buyer.
Typical requirements for an FHA loan for 2024 include:
- Credit score of 580 for a 3.5% down payment. However, you may qualify for the loan if you have a 500-credit score with a 10% down payment. Check for the current FHA credit score requirements.
- DTI of 43% or less. Some borrowers can qualify with a higher DTI, but you may need more money down.
- Home must be used as your primary residence.
Considerations For FHA Loan
There’s no doubt that FHA loans are an attractive option for home buyers in 2023. But you should remember that you will need to pay higher mortgage insurance with FHA loans. And you also need to make this payment for the entire life of the loan, unless you put down 10%. In that, you can cancel mortgage insurance after year 11.
FHA Streamline Refinance Loan Limits
One advantage of having an FHA loan is you can do a streamline refinance when interest rates drop. This FHA streamline program is a low-doc option that gives you the chance to lower your rate without providing your credit, income, or employment information.
When you do a refinance with the streamline program, the new loan must stay within the loan limits. But you can only use the program on a current FHA loan, so you cannot boost your loan balance over current limits.
Other requirements for the streamline program:
- You need to be making your current payments on time.
- Your FHA loan needs to be at least 180 days old.
- FHA will check that you have a financial benefit with the refinance. This means the rate must drop by at least .5%.
Interested In an FHA Loan?
With the higher loan limits for 2023, there’s plenty of interest in the FHA loan program. But how can you ensure you will qualify for this program? Keep the following tips in mind:
- You need to have verifiable income. Most borrowers have W-2s and pay stubs. But you can also qualify with bank statements and a profit and loss statement if you are self-employed.
- It’s important that you can afford the mortgage payment, other debts, and living expenses. The lender will verify that the loan payment isn’t more than 35% of your gross income. Also, you should not have a DTI of more than 48%, which is the sum of your mortgage and other debt payments.
- Save for a down payment. You don’t need 20% down; you can qualify with only 3.5% down, but the more you put down, the lower your payment will be.
- Have credit. You need to have at least two lines of credit to qualify for an FHA loan. In a few cases, an FHA lender may accept on time rent and cell phone payments as proof of credit.
- You generally need to have a credit score of 580 to qualify. But some lenders may allow you to qualify with a lower score. Generally, having a score above 600 will make it easier to get approved.
- Apply for the right type of FHA loan. You can get an FHA mortgage with a fixed or variable rate. Variable rates can run for 3, 5, or 7 years, which then reset to market rates. The variable option can be a good choice if you think you will move in the short or medium term.
- Fixed rate FHA mortgages are the best choice for people who want certainty in their payments over the long term.
- You also should understand the costs of the FHA loan. As noted earlier, you will pay more for mortgage insurance with this loan. However, the interest rate for an FHA loan can be below market rates.
FHA financing is an attractive option for people with lower incomes and credit scores. It’s also appealing because you only need 3.5% down. As the loan limits for these loans are rising in 2024, it’s worth considering.
You should talk to your mortgage lender about the benefits of FHA loans vs. other types of loans. It helps to work with a mortgage broker that can get you approved for a variety of loans.
For people who have had financial or credit issues in the past, FHA house loans can be a great way to move from renting to owning.