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.
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.
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 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:
Qualifications | Conforming Loan | Jumbo Loan |
Loan Amount (For 1 Unit) | $726,200 – $1,089,300 | Up To Several Million Dollars |
Down Payment | 3% – 20% | 10.01% – 25% |
Minimum Credit Score | 620 | 680 |
Maximum Debt-To-Income Ratio (DTI) | 50% | 45% |
Reserves Required | Up To 6 Months | Up To 12 Months |
Loan-To-Value Ratio (LTV) | ≤ 97% | ≤ 89.99% |
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:
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:
Note that jumbo loans sometimes go through a manual underwriting process before approval, so the process can take longer than a conforming loan.
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.