Buying a home is an exciting milestone in life but securing financing can be a daunting process. As you navigate the mortgage market, you’ll likely encounter two main options – jumbo and conventional loans. Both offer advantages and drawbacks depending on your specific situation. This comprehensive guide breaks down the key differences between jumbo and conventional mortgages to help you determine the best choice for your home purchase.
What is a Jumbo Loan?
A jumbo loan is a mortgage that exceeds the conforming loan limit set by the Federal Housing Finance Agency (FHFA) each year. For 2023, the conforming loan limit for most U.S. counties is $647,200. This means any loan above $647,200 is considered a jumbo loan. The conforming loan limit is higher in certain high-cost areas like New York City and San Francisco.
Jumbo loans are offered by private lenders like banks and credit unions. They are not backed by government-sponsored enterprises Fannie Mae and Freddie Mac. As a result, jumbo loans are considered higher risk for lenders. They offset this risk by imposing stricter borrowing requirements on jumbo loans compared to conventional mortgages.
Here are some key features of jumbo loans
- Loan amounts exceed $647,200 in most counties
- Offered by private lenders only
- Not backed by Fannie Mae or Freddie Mac
- Stricter eligibility requirements than conventional loans
- Generally require excellent credit
- Higher interest rates than conventional loans
- Lower maximum loan-to-value ratios than conventional loans
- Require larger down payments, often 20%
Jumbo loans allow borrowers to finance luxury properties or homes in high-cost real estate markets. They are best suited for buyers who need to borrow large sums and meet strict underwriting criteria.
What is a Conventional Loan?
A conventional loan simply refers to any mortgage not backed by the federal government. This includes loans that fall within conforming limits and jumbo loans. The most common type of conventional loan is a conforming loan.
Conforming loans meet the following criteria:
- Loan amount is equal to or below conforming limits ($647,200 in most counties for 2023)
- Must meet underwriting standards set by Fannie Mae and Freddie Mac
- Often purchased and securitized by Fannie Mae or Freddie Mac
- Typically have lower interest rates than jumbo loans
- More flexible eligibility requirements than jumbo loans
Conforming conventional loans offer perks like lower mortgage insurance premiums and better interest rates. This is because they can be resold to Fannie Mae and Freddie Mac on the secondary mortgage market. As government-sponsored enterprises, Fannie and Freddie can provide stable funding at low rates.
Conventional conforming loans are an attractive option for average homebuyers who need to borrow moderate amounts. They offer more flexible borrowing criteria than jumbos.
Jumbo vs. Conventional Loan Comparison
Now that we’ve defined jumbo and conventional mortgages, let’s directly compare the two loan types across several factors:
Loan limits
- Jumbo: Above $647,200
- Conventional: Equal to or below $647,200
Lender types
- Jumbo: Offered by private lenders only
- Conventional: Offered by private lenders and bought by Fannie Mae/Freddie Mac
Interest rates
- Jumbo: 0.125% – 0.25% higher than conforming loans
- Conventional: Lower than jumbo loans
Down payments
- Jumbo: Typically 20% down
- Conventional: As low as 3% down
Credit score requirements
- Jumbo: 700+ credit score
- Conventional: 620+ credit score
Debt-to-income ratio
- Jumbo: 43% or lower
- Conventional: Up to 45%
Loan-to-value ratio
- Jumbo: 75 – 80% LTV
- Conventional: Up to 97% LTV
When to Choose a Jumbo Loan
Given their rigid requirements, jumbo mortgages are not practical for every homebuyer. Here are some situations when a jumbo loan may make sense:
You need to borrow more than $647,200 – Jumbos are required for loan amounts exceeding conforming limits. If you need to finance a luxury property or home in a high-cost market, a jumbo is your only option.
You want access to flexible terms – Some jumbo lenders offer interest-only mortgages, stated income loans, and ARM products not permitted on conforming loans. These flexible options can benefit certain jumbo borrowers.
You have excellent credit and ample cash – Jumbos require top-notch credit scores above 700 and down payments of 20% or more. You’ll also need plentiful cash reserves. If you meet these requirements, you can likely handle a jumbo’s strict terms.
You value relationships – Many jumbo lenders value ongoing client relationships over one-time deals. Borrowing jumbo funds from a private bank you already work with can provide personalized services and dedicated support.
You have complex finances – Jumbo underwriters have expertise handling unconventional financial situations like borrowers with multiple properties and variable income sources. If you have a unique case, a jumbo specialist may offer solutions.
In short, jumbos appeal to upscale buyers with pristine finances buying costly homes. You can benefit from tailoring if you value relationships and have complex assets.
When to Choose a Conventional Loan
Conventional loans are ideal for the average homebuyer. Here are some top reasons to choose a conventional mortgage over a jumbo:
You need flexibility – Conventional loans allow down payments as low as 3% and have more lenient credit score and income requirements than jumbos. Their standards provide more borrowing flexibility.
You want better rates and costs – Thanks to government backing, conforming mortgages offer the best interest rates and lowest fees. Jumbos cost more.
You don’t need to borrow jumbo amounts – Conforming loan limits reach up to $647,200 in most counties, enough for even relatively pricey properties in many areas. Choose conventional if you don’t need over $647,200.
You value ease and speed – The conforming mortgage process is streamlined and well-defined, with set documentation requirements. Government-backed loans close faster than manually underwritten jumbos.
You have moderate finances – Conventional loans have more accessible requirements for credit scores, down payments, and income/reserves. They better suit buyers with average financial profiles.
Overall, conventional mortgages provide the most budget-friendly financing and flexible qualifying standards for mainstream homebuyers. Opt for a conventional mortgage if you don’t need over $647,200 and value low costs plus a smooth borrowing process.
Alternatives to Jumbo and Conventional Loans
Jumbos and conventional mortgages aren’t your only options. Consider these alternatives:
FHA loans – Insured by the Federal Housing Administration, these feature low 3.5% down payments and expanded credit score flexibility. They excel for first-time and low-income buyers.
VA loans – VA mortgages help veterans and military families buy with no down payment. eligibility is easy and they come with favorable rates.
Portfolio loans – Offered by community banks and credit unions, these unconforming mortgages are manually approved and held on lenders’ books rather than sold to Fannie/Freddie. Requirements are flexible but rates may be higher.
Piggyback loans – This option pairs a first mortgage with a second lien like a home equity line of credit. It allows buyers with smaller down payments to avoid pricey private mortgage insurance on conventional loans.
Hard money loans – These short-term, high-cost loans are issued by private investors rather than banks. Hard money loans help borrowers with credit or cash flow issues buy or rehab a property.
Making the Right Mortgage Decision
Choosing between a jumbo and conventional mortgage involves weighing your specific needs against each loan’s qualifications and perks. Conventional loans provide affordable financing and flexible terms for typical homebuyers. Jumbos cater to upscale borrowers who value larger loans and personalized services over low costs.
Carefully assess how much you need to borrow, your financial profile, and what loan features matter most to you. Understanding these tradeoffs allows you to confidently select the ideal mortgage solution for your situation. With the right home loan choice, you’ll be excitedly moving into your dream property in no time!
Jumbo vs. Conventional Loans: A Comparison
In the past, interest rates for jumbo loans were much higher than those for traditional, conventional mortgages. Although the gap has been closing, they still tend to be slightly higher. You may even find some jumbo rates that are lower than conventional rates. A mortgage calculator can show you the impact of different rates on your monthly payment.
Jumbos can cost more in other ways, though. Down payment requirements are more stringent, at one point reaching as high as 30% of the home purchase price, though it is more common now to see jumbo loans requiring a down payment of 15% to 20%, higher than the 10% to 15% that some conventional loans require (and of course far higher than the 3.5% that FHA and other federal loans allow).
The higher interest rates and down payments are generally put in place primarily to offset the higher degree of risk involved with jumbos because Fannie Mae or Freddie Mac does not guarantee them.
Jumbo mortgages often have higher closing costs than normal mortgages because they are large loans.
Lenders expect more of jumbo borrowers, too. Their credit scores need to be higher (preferably above 700), their DTIs lower, and their bank account balances must cover 12 months worth of homeownership expenses—just about double the requirement for conventional mortgage borrowers. In other words, jumbo mortgagors are expected to be people with few debts and lots of liquid assets.
Heres a comparison of typical terms for jumbo and conventional mortgages.
| Conventional vs. Jumbo Mortgages Comparison | ||
|---|---|---|
| Conventional Loan | Jumbo Loan | |
| Maximum Loan Amount | $647,200-$970,800* | $766,550 and up |
| Typical Down Payment | 3%-20% | 10%-20% |
| Minimum Credit Score | 620 | 700 |
| Debt to Income Ratio | 43%-45% | 36%-43% |
| Cash Reserves Needed | 0-6 months’ homeownership expenses | Up to 12 months’ homeownership expenses |
| Maximum Loan-to-Value Ratio | 97% | 90% or less |
| Backed by FNMA/FRMC? | Yes | No |
| *based on 2022 FHFA figures | ||
Jumbo Loan Requirements
Because federal agencies dont back jumbo loans, lenders take on more risk when offering them. Youll face more stringent credit requirements if youre trying to secure one. Youll also need to meet some minimum requirements to qualify, including:
- Proof of income: Come prepared with two years worth of tax documentation or similar paperwork to prove that you have a reliable, consistent source of income. Lenders will also want to see you have enough liquid assets to cover six months worth of mortgage payments or more.
- Credit score and history: The higher, the better. Theres a very low probability that lenders will approve you for a jumbo mortgage if your credit score falls far below 700.
- DTI ratio: Your debt-to-income ratio (monthly debt obligations compared to your monthly income) should be no more than 43% to 45% to qualify for a conventional mortgage. Lenders will typically look for an even lower DTI for jumbo mortgages—at the most 43% and ideally 36% or even less—because the loans are so large.
- Loan to value: LTV for jumbo loans may be stricter than a conventional mortgage, often requiring an LTV of 80% or lower. This means that the loan can finance no more than 80% of the propertys purchase price.
- Down payment: Because of the LTV requirements, you will likely need to come up with at least 20% upfront as a down payment.
Jumbo vs. Conventional Mortgage
FAQ
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