Air carrier flight crew flying 737-800 aircraft reported altitude deviation on approach.

Narrative

Altitude deviation during vector to final ILS XX at ZZZ. We were given instructions to descend and maintain 3;000 until established and clear for ILS XX approach. We were on a vector to intercept the localizer outside of the IF prior to the FAF. FO suggested dialing in the next altitude for the FAF which was 1;600. I approved; confusing VNAV procedures with the level change mode we were in. Instead of leveling at 3;000 until crossing the IF; the jet dutifully continued descending toward 1;600 before we were established on the localizer. ATC called us out and we leveled and began to climb at 2;100. We were told to maintain 2;200 and intercept the glideslope from there. The remainder of the approach and landing went without incident.Lost track of level of automation and failed to prevent an altitude deviation.As pilot monitoring; I need to be on guard and ready for the pilot flying to make mistakes. His suggestion sounded perfectly reasonable; and if we were in VNAV; it would have been. Given the current level of automation we were in; it was the exact wrong thing to do. Slowing down and thinking through what he was asking rather than automatically approving this suggestion would probably have prevented this infraction.