The federal government is increasing the loan limits it supports, including mortgages above $1 million in high-cost areas. Home prices are still rising by double-digit percentages year-over-year.

The cap for home loans backed by Fannie Mae and Freddie Mac — two government-controlled entities that buy mortgages from lenders — will rise this year to $726,200 in most of the U.S. and $1,089,300 in high-cost markets, which includes parts of California, New York and Virginia.

The key takeaway: Homebuyers will be able to get larger mortgages that are guaranteed by the government if they have higher conforming loan limits.

New ceiling to 2023 conforming loans

Conforming loans are less risky than non-conforming loans because the Federal Housing Finance Agency keeps the guidelines updated each year. If you are approved for a conforming loan you might get a lower interest rate than a nonconforming loan.

Here are the details about conforming loan limits for 2023.

  • Home prices rise with loan limits The FHFA base the conforming loan limit increases on the House Price Index for third quarter 2022. Despite some softening in the real estate market this year, home prices rose 12.4% between the third quarter 2021 and the third quarter 2022.
  • Rapid realty price changes — Looking back to 2020, conforming loans limits were only $510,400 for single-unit properties in most parts of the U.S., and $765,600 in high-cost areas. This means that conforming loan limits have increased by 42% in a short time for most areas.

How can you get your finances in order to buy a house

Higher home prices make it more important to evaluate your financial situation before you decide to purchase a house. You’ll need to determine how much house you can afford due to rising interest rates.

These are some things you might want to consider.

  • Make a down payment. Conventional loans can be obtained from banks with down payments as low at 3%. FHA loans, which are government-backed mortgages, allow for down payments as low as 3.5%. VA loans and USDA loans might not require any down payment.
  • Make sure you take stock of your credit score and debt ratio before applying for a mortgage.

Tips to choose the best mortgage lender

You should also shop around for the best mortgage option for you. There are several factors you should discuss with potential lenders when choosing a mortgage loan. These include the type of loan you want, the interest rate, additional costs and fees, and the term.

  • Loan types You may be able choose between conventional loans, FHA loans, or other government-backed home loans. Ask lenders for specific features such as a low downpayment or financing certain closing costs.
  • Interest rates — There are two types of mortgage interest rates that you should discuss with your lender. They are fixed and adjustable. If you intend to live in your home for a long period of time, fixed-rate mortgages may be a better choice.
  • Fees and costs — Ask about closing costs, discount points, and prepayment penalties when comparing lenders. These could affect the cost of your loan.