Jumbo vs. Conventional Mortgages: What's the Difference?

Jumbo vs. Conventional Mortgages: An Overview

Two types of financing that borrowers might utilize to buy homes are jumbo mortgages and standard mortgages. Homeowners must meet specific eligibility conditions for both loans, such as minimum credit scores, income requirements, repayment capacity, and down payments. Both are mortgages that are offered and underwritten by private lenders rather than public institutions like the Federal Housing Administration (FHA), the U.S. USDA Rural Housing Service or the Department of Veterans Affairs (VA) (RHS).

These two mortgage products have a number of significant distinctions even though they may have the same goal—to secure a property. Jumbo mortgages are used to buy homes with high asking prices, frequently ones that over $1 million. Contrarily, conventional mortgages are smaller and more suited to the requirements of the typical homebuyer. A government-sponsored entity (GSE), like Fannie Mae or Freddie Mac, may also buy them.

Jumbo Mortgages

Jumbo mortgages, as their name suggests, are loans used to finance expensive residences. In essence, they entail huge sums—at least $650,000 and frequently far into the millions. Jumbo mortgages are typically used to finance luxury residences as well as those located in local real estate markets that are extremely competitive.

Jumbo mortgages or loans are nonconforming, mostly due to their size. That implies they are prohibited from receiving support from Fannie Mae or Freddie Mac because they violate Federal Housing Finance Agency (FHFA) restrictions on loan sizes and prices. Additionally, they go beyond the county's maximum conforming loan limit.

Other factors that prevent jumbo loans from being considered conforming loans include wealthy borrowers with special requirements or interest-only mortgages that result in balloon payments, where the entire borrowed amount is due at the end of the loan term. Despite this, many jumbo loans still follow the standards for qualified mortgages established by the Consumer Financial Protection Bureau, such as not allowing excessive fees or loan terms, or negative amortization (CFPB).

Borrowers need to be in good financial standing in order to be approved for a jumbo loan. Additionally, borrowers should fall into a higher income range. After all, maintaining the regular mortgage payments and other associated expenses requires a sizable sum of money. Additionally, borrowers are expected to have low debt-to-income (DTI) ratios because lending standards have tightened as a result of the financial crisis.

Jumbo Loan Requirements

Jumbo loans are riskier for lenders to provide because they aren't insured by federal agencies. If you're looking for one, the credit standards will be more demanding. Additionally, in order to be eligible, you must fulfill a number of prerequisites, such as:

Proof of Income: Bring two years' worth of tax returns or other equivalent evidence to demonstrate that you have a steady, predictable source of income. Additionally, lenders will want to see that you have enough liquid assets on hand to make your mortgage payments for at least six months.

Credit score and history: The higher, the better. There’s a very low probability that lenders will approve you for a jumbo mortgage if your credit score falls far below 700.

DTI ratio: To be eligible for a traditional mortgage, your monthly debt payments should not be higher than 43% to 45% of your monthly income. Because jumbo mortgages are so huge, lenders will frequently seek even lower DTIs—at most 43% and ideally 36% or even less.

Loan to value: Compared to a regular mortgage, LTV requirements for jumbo loans may be tougher, frequently calling for an LTV of 80% or less. This indicates that no more than 80% of the property's purchase price may be financed by the loan.

Down payment: Because of the LTV requirements, you will likely need to come up with at least 20% up front as a down payment.

Conventional Mortgages
A conventional mortgage, technically speaking, is any mortgage that is not insured by the federal government. Therefore, anything provided and granted by commercial lenders like banks, credit unions, and mortgage firms that isn't an FHA loan, VA loan, or USDA loan might be termed a conventional loan or mortgage.

Conventional mortgages, as opposed to jumbo loans, can be either conforming or nonconforming. The FHFA sets size limitations for conforming loans, and Fannie Mae and Freddie Mac establish the underwriting standards. These rules take into account the borrower's credit rating and history, DTI, loan-to-value (LTV) ratio, and one more crucial element: the loan's size.

Every year, conforming loan ceilings are increased by the same proportion as home prices to keep up with the national average for home prices. The nationwide ceiling for conforming conventional loans for a single-unit residence in 2022 is $647,200, an increase from $548,250 in 2021.

(Important: Between 100 and 200 counties are identified as high-cost, competitive locations each year in the United States. In these places, maximum loan amounts may increase to $970,800 in 2022 from $822,375 in 2021. These places include Nantucket, Los Angeles, and New York City. Therefore, if mortgages in these real estate markets were to exceed these sums, they would be referred to as "jumbo" mortgages.)

As long as a mortgage complies with the FHFA's size restrictions and Fannie Mae and Freddie Mac's conforming loan requirements, they will buy, package, and resell almost any mortgage. What makes this important? Since these two government-sponsored organizations dominate the mortgage market, being able to sell a loan to one of them—as most lenders eventually do—makes it significantly less hazardous from the lender's perspective. As a result, they are more likely to accept a request for it and provide better terms.

Conventional loans need a down payment, a minimum credit score, a specific level of income, as well as a low DTI ratio, just as jumbo loans. Before a lender can approve you for a traditional mortgage, your credit score typically needs to be at least 620 (which is regarded as "fair").

However, not all conventional mortgages follow these rules, and those that do are referred to as nonconforming loans. Because they aren't guaranteed by the government or sellable to Fannie Mae and Freddie Mac, these are typically more difficult to qualify for than conforming mortgages. Instead, eligibility requirements and terms are set by the lenders.

(Important: If you want to get technical, a jumbo loan is, in lender-speak, a conventional, nonconforming loan.)

Jumbo vs. Conventional Loans: A Comparison

In the past, interest rates for jumbo loans were much higher than those for traditional, conventional mortgages. They still tend to be slightly higher, although the gap has been closing. 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 they are not guaranteed by Fannie Mae or Freddie Mac. 

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.

Here's a comparison of typical terms for jumbo and conventional mortgages.

Frequently Asked Questions

How Are Jumbo Mortgage Rates Set?

Similar to traditional mortgages, rates are dependent on benchmarks set by the Federal Reserve as well as specific elements like the borrower's credit score. Jumbo mortgage rates will fluctuate along with short-term interest rates set by the Fed.

Additionally, borrowers will be subject to stricter credit standards because these loans are more expensive than $500,000 and provide a significant risk to lenders. A lower debt-to-income ratio and a considerably higher credit score (typically at least 700) are two examples of this. Additionally, borrowers must demonstrate to lenders that they have a particular quantity of cash on hand. Your jumbo mortgage rate will be lower the better your credit situation.

Are Jumbo Loan Rates Higher than a Conventional Mortgage?

Jumbo loans, even though they are larger in size, often have lower interest rates today than conventional mortgages.

Which Should I Choose: A Jumbo or Conventional Loan?

A jumbo loan will automatically be applied if your mortgage is larger than $647,200. If you are buying a pricier home that exceeds the conventional loan limits, you will have to choose a jumbo loan, unless you can come up with a down payment large enough to get the loan's value under that limit.

What Are Mortgage Points?

Mortgage points, commonly referred to as discount points, are a charge borrowers make to lenders in exchange for a cheaper interest rate. In other words, you are paying interest ahead of time to lower the total cost of your loan over its lifetime. A mortgage point costs one percent of your loan balance. For instance, you would spend $5,000 to lower your interest rate by 0.25% if you took out a loan for $500,000. Although it might not seem like much, the interest on a loancan build up to tens of thousands of dollars.

How Big a Mortgage Can I Afford?

Your ability to borrow money will be influenced by a number of variables, including your credit score, income, assets, and property worth. High earners—basically, those who can afford the larger payments—are typically the greatest candidates for jumbo mortgages.

You are not required to buy a home up to the maximum loan amount, even if the lender offers a specified loan amount. Think carefully about how much you want to pay and can comfortably afford in order to reach your other financial objectives, such as retirement savings.

The Bottom Line

A jumbo mortgage is a sizable loan provided by private financial institutions and designated for expensive houses with a price tag of at least $650,000. An all-encompassing, more comprehensive word for any privately issued—as opposed to nationally subsidized—mortgage is "conventional loan."

The FHFA yearly sets a size requirement for conforming loans, which are many conventional loans that can be sold to mortgage market makers Freddie Mac and Fannie Mae. Other conventional loans are regarded as nonconforming since they are not.

But the fact remains that conventional loans are often smaller than jumbo loans and have fewer restrictions and standards.

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