If you’re wondering what the difference between a jumbo vs conventional mortgage is, you’ve come to the right place. We’ve rounded up the pros and cons of each and the key differences between the two.
Choosing the right mortgage could be the difference between saving money on interest and better loan terms. Whether you’re searching for a million-dollar home or a $200,000 home, your mortgage will look different.
This is why it’s helpful to understand the differences between the two loans. From the lending requirements to the home prices, think of this as your go-to guide to jumbo and conventional mortgages.
What Is a Jumbo Loan?
A jumbo mortgage is a loan taken out to finance a home. The key difference with a jumbo loan is that they are typically used for higher-priced or luxury real estate. In high-demand markets, for example, where real estate is at a premium, homeowners often use jumbo loans.
A jumbo loan is considered non-conforming. That means that a jumbo loan isn’t backed by Freddie Mac or Fannie Mae. They are outside of the Federal Housing Finance Agency’s (FHFA) loan restrictions.
Another key difference between a jumbo loan and a conventional loan is the loan terms. You’ll typically see much stricter loan requirements for a jumbo loan. This is because the monthly payments are typically higher than with a conventional loan.
Qualifying for a Jumbo Loan
To make sure a buyer can keep up with the high mortgage payments, your lender will need to see excellent credit, high income, and a low debt-to-income ratio. Your debt to income ratio is the amount of debt you have compared to the income you have coming in.
In terms of down payments and interest rates, the gap between the two types of mortgages isn’t as drastic as it once was. It’s not uncommon to see similar down payments and interest rates between the two mortgages.
Your specific down payment requirements and the loan terms you’re given will depend on your own unique financial situation. Typically, the better your credit, the lower your interest rate will be regardless of the type of loan you choose.
As with a jumbo loan, you’ll need a down payment and a minimum credit score to qualify for a conventional mortgage. You’ll also need to meet certain income requirements. The lower your debt-to-income ratio, the better your loan terms are as well.
As mentioned above, jumbo loans are considered non-conforming. A conventional loan can be either non-conforming or conforming. A conforming loan must follow loan limits set through the FHFA.
These limits change each year to keep up with inflation and the average home price in the United States. For 2021, the maximum you can borrow for a conventional conforming loan is $548,250. This is for a single-family home.
The limit is also different depending on the county you live in. If you live in New York City or Nantucket for example, where real estate is expensive, you can go as high as $822,375 using a conventional mortgage.
Weighing the Pros and Cons
When you’re applying for a loan, you’ll want to weigh the pros and cons of a conventional mortgage and a jumbo loan. One advantage to a jumbo loan is that they tend to cost less. With higher down payments, a higher income, and a lower interest rate, you’ll pay less for your mortgage over time.
Because a jumbo loan isn’t backed by the Federal Government, however, your credit and finances will need to be impeccable. Lenders are assuming all the risk with a jumbo loan. That means you’ll face stiffer loan requirements.
When it comes to a conventional loan, you’ll see lower credit requirements. You can also qualify for an FHA loan with less money down. There are more programs available for first-time homebuyers, USDA loans, VA loans, and HUD loan programs.
Applying for a Loan
Whichever loan you apply for, you’ll need to have a few key documents handy. First, expect to be asked for two years’ worth of tax returns, and W2’s You’ll also need your most recent paystubs. You should also have your estimated down payment.
Before you apply, it’s also helpful to write out your income and expenses. This can help you gauge affordability and see where you can make some cuts. A good rule of thumb is to keep your housing expenses to a third of your income.
Your credit will be pulled, so it’s always a good idea to run it yourself before you apply. You can see where you can improve and if there’s anything you’d like to dispute on your report. You can run your credit for free each year from the Federal Trade Commission.
Take some time while you search for a home to pay down your debt. Lowering your debt will open up more loan options and better terms. Don’t close any credit cards to keep your credit availability high.
Jumbo vs Conventional Mortgage
If you’re considering a jumbo vs conventional mortgage, there are a few major differences to keep in mind. First, look at the price of the home you’re buying and how expensive your housing market is. Next, weigh your down payment, income, and credit.
When you’re ready to get started, we have mortgage professionals waiting to assist. Fill out the application form here to kick-start your mortgage. We’ll help you find the best mortgage for your new home.