Are you looking to buy a house? Before you start daydreaming about your new home, you need to consider which type of mortgage youre going to use to buy it. You could opt for a regular conforming mortgage. But what if you want to buy an expensive home? For that, you probably need a jumbo mortgage.
Jumbo mortgages are large loans that fall above the federal loan limit. These loans are typically harder to qualify for than conforming loans, but they can offer competitive interest rates. They’re also a convenient way for borrowers to secure the money they need to purchase expensive homes.
Buying a home is one of the most exciting yet stressful decisions you’ll make in life. And a huge part of that process is figuring out how you’ll finance your new home through a mortgage loan. Two common options homebuyers consider are jumbo loans and conforming loans. But what exactly is the difference between these two loan types and how do you know which is best for your situation?
In this comprehensive guide, we’ll break down everything you need to know about jumbo versus conforming loans. We’ll explore what each loan is, how they work, their benefits and drawbacks, and help you determine if a jumbo or conforming mortgage is the right choice when purchasing your dream home.
What is a Jumbo Loan?
A jumbo loan, also known as a non-conforming loan, is a mortgage that exceeds the lending limits set by the Federal Housing Finance Agency (FHFA) for conforming loans backed by Fannie Mae and Freddie Mac.
The conforming loan limit is currently $647200 in most U.S. counties, though it can go up to $970,800 in certain high-cost areas like San Francisco and New York City. Any loan amount above those thresholds is considered a jumbo loan.
Jumbo loans are popular with luxury homebuyers because they allow you to borrow more money than a conforming loan They also typically have lower down payment requirements than conforming loans.
How Does a Jumbo Loan Work?
When you apply for a jumbo loan, the lender will evaluate your finances, including your income, assets, credit score and debt-to-income ratio.
Here are some common jumbo loan guidelines:
- Credit Score: 720 or higher
- Down Payment: 15-20%
- Debt-to-Income Ratio: 36% or lower
- Cash Reserves: 12-24 months of mortgage payments in savings
If you qualify, you can use the jumbo loan to purchase a more expensive primary residence, second home or investment property. Jumbo loans come in both fixed and adjustable interest rates over loan terms of 15 or 30 years typically.
The interest rates on jumbo loans used to be much higher than conforming loans, but in recent years they have become more competitive. However, jumbo loans can still have slightly higher rates because they are viewed as riskier by lenders.
Benefits of Jumbo Loans
Here are some of the biggest advantages of jumbo loans:
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Higher Loan Limits – Jumbo loans allow you to borrow above the conforming loan limits, which is essential if you want to buy a luxury or high-cost property.
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Lower Rates Than HELOCs – The interest rate on a jumbo mortgage is usually lower than a home equity line of credit (HELOC) or home equity loan.
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Competitive Rates – Interest rates have become very close to conforming loan rates, especially for borrowers with excellent credit.
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Fixed & Adjustable Options – You can choose between a fixed or adjustable rate jumbo loan to find the best rate and payment for your situation.
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Lower Down Payments – Many jumbo loans only require 10-15% down instead of the traditional 20% down conforming loans require.
Drawbacks of Jumbo Loans
The disadvantages of jumbo loans include:
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Higher Interest Rates – While more competitive today, jumbo loan rates are sometimes 0.25-0.50% higher than conforming loans.
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Tougher Qualifying Standards – You’ll need pristine credit, low debt, and plenty of savings to qualify for a jumbo loan.
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Higher Fees – Origination fees and other closing costs may be higher compared to conforming loans.
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Prepayment Penalties – Some jumbo loans impose penalties if you pay off your mortgage early.
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Difficult to Refinance – Refinancing a jumbo loan into a conforming loan can be challenging.
As you can see, jumbo loans allow high-income borrowers to secure the financing they need for a luxury home purchase but they come with more stringent approval guidelines.
What is a Conforming Loan?
A conforming loan refers to a conventional mortgage that meets the funding criteria set by Fannie Mae and Freddie Mac. These government-sponsored enterprises purchase conforming loans from lenders to replenish their available capital for issuing new mortgages.
The current conforming loan limit for a single-family home is $647,200 in most areas. Loan limits are higher in competitive housing markets classified by the FHFA as “high cost.”
Conforming loans must also meet debt-to-income, down payment, credit score and loan term requirements. These standardized qualifications allow conforming mortgages to be easily traded on the secondary mortgage market.
How Does a Conforming Loan Work?
The conforming loan process looks like this:
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You apply and the lender checks you meet the conforming loan requirements. This includes a minimum 620 credit score and maximum 45% debt-to-income ratio in most cases.
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If approved, you can use the conforming loan to buy a primary residence or second home within the current loan limit for your county.
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Conforming loans come in 15 and 30-year terms with fixed or adjustable interest rates. Your rate will depend on your finances and current market rates.
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If your down payment is less than 20%, you’ll have to pay private mortgage insurance (PMI).
Conforming loan qualifications are more flexible than jumbo loan requirements. They offer an affordable path to homeownership for the average buyer.
Benefits of Conforming Loans
Why might a conforming loan be right for you? Here are some of the top benefits:
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Lower Interest Rates – Conforming loans often have interest rates 0.25-0.50% less than a jumbo mortgage.
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Lower Fees – Origination fees and closing costs are typically lower with conforming loans.
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Easier to Qualify – Minimum credit scores and down payments are lower than jumbo loans.
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No Prepayment Penalties – Conforming loans let you pay off your mortgage early with no penalties.
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Easy to Refinance – Conforming loans can be easily refinanced in the future if rates drop.
Conforming loans offer homebuyers more affordable rates and terms compared to jumbo mortgages.
Drawbacks of Conforming Loans
Some downsides of conforming loans include:
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Lower Loan Limits – The maximum loan amount you can borrow is capped based on county loan limits.
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PMI Requirements – If your down payment is under 20%, you’ll have private mortgage insurance added to your monthly payment.
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Not Available for Investment Properties – Conforming loans can only be used to purchase a primary residence or second home.
While conforming loans are a great option for many, the lower loan limits and PMI rules deter some homebuyers. The criteria is also more strict than government-backed FHA and VA loans.
Jumbo vs Conforming Loan Rates
One of the biggest factors when choosing between a jumbo and conforming loan is the interest rate. Let’s compare current rates:
| Loan Type | Interest Rate |
|---|---|
| Conforming | 4.5-6% |
| Jumbo | 4.75-6.25% |
As you can see, conforming loans tend to have interest rates around 0.25-0.50% lower than jumbo mortgages. However, borrowers with excellent credit scores can sometimes obtain similar rates for both loan types.
The rate gap has narrowed in recent years as lenders view qualified jumbo borrowers as less risky. But conforming loans still maintain a slight rate advantage in most cases.
Jumbo vs Conforming Loan Qualifications
Jumbo and conforming loans have different qualification requirements. Here’s an overview:
| Conforming Loan | Jumbo Loan | |
|---|---|---|
| Credit Score | 620+ | 720+ |
| Down Payment | 3-20% | 15-20% |
| Debt-to-Income Ratio | <45% | <36% |
| Cash Reserves | 1-6 months | 12-24 months |
As you can see, jumbo loans require much higher credit scores, down payments, and cash reserves compared to conforming loans. The approval criteria is stringent to offset the larger loan amounts.
Conforming loans offer more flexibility for homebuyers. If your finances don’t meet jumbo loan standards, a conforming mortgage may be your best option.
Who Should Get a Jumbo Loan?
A jumbo loan is ideal for certain buyers:
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Luxury Homebuyers – If you need to finance more than $647,200, a jumbo loan is your only option. These loans cater to luxury real estate purchases.
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High-Income & Wealth – Jumbo loans work for buyers who have great credit, large down payments,
Jumbo vs. conforming loan: what’s the difference?
From big and small to high-interest and low-interest, mortgages come in all shapes and sizes. The two most common types are jumbo, or non-conforming, and conforming. To understand the difference between the two, lets touch on federal loan limits.
The Federal Housing Finance Agency (FHFA) sets conforming loan limits annually. Loan limits determine whether mortgages are eligible for purchase by Fannie Mae and Freddie Mac. Mortgages that fall within these limits are considered conforming. Mortgages that fall outside these limits are considered non-conforming.
The government uses two businesses — Fannie Mae and Freddie Mac — to purchase conforming mortgages. That makes regular mortgages less risky for lenders to issue. But what happens when you need a house that costs more than the limit?
Some lenders will let you take out a jumbo mortgage. These are non-conforming mortgages used to finance mortgages over the FHFA loan limit. These mortgages are typically kept by the lender and are not guaranteed or insured, which makes them riskier. Every jumbo lender will have its own standards for making these loans.
You might want a conforming mortgage if:
- Youre financing a mortgage under the loan limit.
- You have a decent credit rating.
- You have a low-to-moderate income.
Conforming Loan vs Jumbo Loan: Choosing The Best Loan Based On Location and Budget | NerdWallet
FAQ
What is the difference between jumbo loan and conforming loan?
Are all jumbo loans non conforming?
Why would someone want a jumbo loan?
Why are jumbo rates lower than conventional?