Jumbo Vs. Conventional Loans: Is There A Difference?

When buying a house, you may not realize the wide variety of loan types available to you. As soon as you start talking with your lender, you’ll quickly realize you can tap into a range of government- and non-government-backed loan options.

Let’s take a look at jumbo versus conventional conforming loans, the requirements for each type of loan and some FAQs pertaining to each. But first, let’s clear up a common misconception.

Is There A Difference In A Jumbo Loan Vs. A Conventional Loan?

Jumbo loans are mainly used for large, luxury homes or properties in competitive markets. A jumbo loan exceeds the Federal Housing Finance Agency (FHFA) limits for conventional loans bought by Fannie Mae or Freddie Mac. The mortgage industry also calls jumbo loans “nonconforming loans” because they don’t “fit” within these limits. Put simply, jumbo loans go above and beyond what conforming loans cover.

A conventional mortgage is, by definition, any non-government-backed loan. Most conventional mortgages meet Fannie Mae and Freddie Mac requirements and are therefore also considered “conforming,” but jumbo loans – which are nonconforming – are also considered conventional mortgages because they’re not insured by the federal government.

What Are Conforming Loan Limits?

Every year, the FHFA puts a dollar limit on the mortgages that Freddie Mac or Fannie Mae will buy or guarantee. Fannie Mae and Freddie Mac are government-sponsored entities originally created by Congress. They buy mortgages from lenders and repackage them into mortgage-backed securities before selling them to investors on the secondary mortgage market. This provides stability to the mortgage market, and the trickle-down effect is lower interest rates for consumers.

If you’re unsure of which type of loan you should use, consider how much you’ll need to borrow to purchase a home. If your desired loan amount is over the FHFA’s conforming loan limit, a jumbo loan may be right choice for you.

Jumbo And Conforming Loan Comparison

Jumbo and conforming mortgages have more differences than just the loan amount you can borrow. Here’s a snapshot of the qualification requirements for these two types of loans and how they’re different:

Jumbo Loan Requirements Vs. Conforming Mortgage Requirements

The process of applying for a jumbo (nonconforming) loan is similar to the process of applying for a conforming mortgage, but jumbo loans typically have stricter requirements – as you can see above. Here’s more on the differences in requirements for jumbo loans versus conforming loans:

• Credit score: You may need a minimum credit score of 620 for a conforming loan and a 680 or better credit score for a jumbo loan. If you have a credit score at the low end of the qualifying range, you may face a higher interest rate for both loan types.
• Income: A higher loan amount means bigger monthly payments. Therefore, you must earn more money. You should be able to show predictable, regular income with both types of loans, but with a jumbo loan especially, your lender will want to see evidence of enough steady income.
• Down payment: Lenders will likely require a down payment of 10% or more on jumbo loans for 1-unit homes. You may need to put more down on second homes, investment properties and properties that are two to four units. The down payment requirement may also be based in part on your loan amount and credit score.
• DTI: For most conforming conventional loans, you’ll need a DTI of 50% or less, but the specific requirement depends on the type of mortgage you’re applying for.
• Required reserves: You usually need to have up to 6 months of reserves for a conforming loan and up to 12 months for a jumbo loan.

Talk with your lender about qualifications and the personal information you’ll need to provide. Home buyers typically must provide the lender with the following items:

• Pay stubs
• Tax returns
• Bank statements
• W-2 forms or 1099s

Note that jumbo loans sometimes go through a manual underwriting process before approval, so the process can take longer than a conforming loan.

Mortgage Rates For Jumbo Vs. Conforming Loans

Your lender will likely charge higher jumbo loan rates versus conforming rates. This is because you’re seeking a larger loan amount with a jumbo loan, creating more risk for the lender.

However, not all jumbo loans have a higher interest rate. Whether there’s a difference in rate depends at least in part on market demand for jumbo and conforming loans. If the interest rate for jumbo loans is higher than the rate for conforming mortgage loans, the difference is typically just 0.25% – 1%.

Keep in mind that your rate will be influenced by your personal financial situation, too. The best course of action you can take is to apply for a home loan and see which types of financing you qualify for and at what rates.