U.S. Government Now to Back Mortgages More Than $1 Million. Here's What It Means for Home Buyers

Conforming loan limits will soon be a lot higher than they've been in the past.

Most people who want to buy a home can't just do so in cash -- especially not at today's prices. Instead, they need to finance their home purchases by taking out a mortgage.

If you're looking for a mortgage, you may want to stick to a conforming loan. A conforming loan is a government-backed mortgage whose total is below a certain threshold. Conforming loans are those that are suitable to be sold to Fannie Mae or Freddie Mac, the government-sponsored entities that buy mortgages. 

Why might you care if your mortgage is conforming or not? It's simple. 

Conforming loans tend to be less expensive from an interest rate perspective. Because these loans can be sold to Fannie Mae and Freddie Mac, the lenders that issue them take on less risk. Non-conforming loans carry more risk for lenders, and that risk is typically passed along to borrowers in the form of higher mortgage rates.

Meanwhile, the limits for conforming mortgages tend to change from year to year. In 2023, conforming loan limits are rising substantially, and that could work to buyers' benefit.

Conforming loan limits for 2023

Home prices have soared a lot in the past couple of years. Conforming loan limits are rising to reflect these costs. 

Right now, the limit for conforming loans for most of the country is $647,200. For high-cost areas, it's $970,800.

In 2023, the limit for conforming loans for most of the country is rising to $726,200. For high-cost areas, it's surpassing the $1 million mark at $1,089,300.

How much of a mortgage should you take out?

Higher conforming loan limits give you the option to borrow more money without having to seek out a mortgage that may be more expensive for you. But it's still important to know how much of a loan you can afford to take on.

To that end, it pays to stick to the 30% rule. Generally speaking, your housing costs, including your mortgage payment, property taxes, and homeowners insurance premiums, should not exceed 30% of your take-home pay. And so the mortgage you take out should allow you to stick to that limit. If you exceed it, you'll risk falling behind either on your housing costs or on other bills. Neither is ideal. 

In fact, you shouldn't look at rising conforming loan limits as an invitation to spend more on a home. These increased limits are a reflection of what the housing market looks like today. They're not meant to inspire home buyers to take out larger mortgages. 

Right now, home prices are still quite elevated, largely due to a notable lack of housing inventory. Once real estate inventory picks up nicely, we could see home prices come down, allowing borrowers to take out smaller mortgages. But at this time, taking out a mortgage could end up being an expensive prospect, especially since borrowing rates are high. And for that reason, it might make sense to put your home-buying plans on hold for now.