US government will back home loans over $1 million

The rising mortgage rates and high home prices pushed more Americans further away from the dream of owning a home. To address these changes, the federal government plans to begin backing up home loans greater than $1 million in high-cost housing markets, such as California and New York. 

In 2023, the benchmark for mortgages eligible for backing by Fannie Mae and Freddie Mac will rise to $1.089 million in pricey markets, according to the Federal Housing Finance Agency (FHFA). In most other markets across the country, the federal government will back home loans of $726,200, up from $647,200 in 2022.​ 

The government-backed loans provide benefits to both lenders and borrowers. The backing agencies insure the loan amount and, therefore, protect lenders against defaults on payments. In addition, these types of loans usually offer lower interest rates and credit score requirements, making it easier for first-time buyers and lower-income households to afford a home. 

The FHFA uses a specific formula related to home prices to determine the new limit for conforming loans. Over the past two years, the median sale price of a US home jumped from $333,000 to $398,000, according to Redfin. This increase in home prices coupled with the rising mortgage rates, which have more than doubled in the past year, present a significant challenge to homebuyers. 

The changes to the lending limits will take effect in January. The federal government will back home loans of more than $1 million in multiple high-cost areas, including California, Washington, D.C., New York City, and the Mountain West region. Moreover, the $1 million loan threshold will also be established for one-unit properties in Hawaii, Guam, and the U.S. Virgin Islands.

Although this increase in government-backed loan limits is welcome news, many homebuyers in pricey areas are already paying more than $1 million for their homes. A recent survey from the California Association of Realtors showed that about a quarter of homes sold in this state in 2022 were purchased by first-time buyers who paid between $1.25 million and $2 million. 

Resources:

“FHFA Announces Conforming Loan Limit Values for 2023,” (Federal Housing Finance Agency, 2022)

“Government to back home loans over $1M,” by TRD Staff (The Real Deal, 2022)

“U.S. Government to Backstop Mortgages Above $1 Million in High-Cost Areas,” by Andrew Ackerman (Wall Street Journal, 2022)

“Federal government will back $1 million mortgages for the first time,” by Aimee Picchi (CBS News, 2022)