Jumbo Vs. Conventional Loans: Is There A Difference?

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 that you can tap into a range of government- and non-government-backed loan options. Let’s talk about two specific non-government-backed loans – jumbo and conventional loans.

We’ll compare jumbo vs conventional loans, the requirements for each type of loan and several FAQs related 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's (FHFA) limits for conventional loans bought by Fannie Mae or Freddie Mac. The mortgage industry also calls jumbo loans "nonconforming loans" because they do not "fit" within these limits. Put simply, jumbo loans go above and beyond what conforming mortgages can’t cover.

However, a conventional mortgage can be a non-government-backed loan made by a private lender. Most conventional mortgages meet Fannie Mae and Freddie Mac requirements and are considered conforming, but nonconforming loans such as jumbo mortgages are also considered conventional.

What are conforming loan limits? Every year, conforming loan limits put a dollar limit on 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. They then sell these to investors on the secondary mortgage market. This provides stability to the mortgage market and the trickle-down effect is that they help reduce interest rates for consumers.

Jumbo and conforming mortgages have more differences than just the loan amount you can borrow. Let's take a look at the differences between these two types of loans, but first, a few vocabulary words:

• Down payment: A down payment is the amount you put down at the outset of getting a loan.

• Minimum credit score: Your credit score is a three-digit number that represents how well you pay back debt.

• Debt-to-income ratio: Debt-to-income ratio (DTI) is a percentage that tells lenders how much money you spend versus how much money you have coming in. You can calculate DTI easily – just add up your monthly minimum debt payments and divide that amount by your monthly pretax income.

• Cash reserves: In order to make sure you can make your loan payments, your lender may confirm that you have money in your bank account so you can make consistent, regular loan payments.

• Loan-to-value ratio: Your loan-to-value (LTV) ratio refers to an assessment of the appraised value of a home versus the loan amount that you plan to borrow.

 The above borrower’s requirements could vary depending on your lender, the loan amount, your state and your individual financial situation.

Jumbo Loan Requirements Vs. Conforming Mortgage Requirements

Applying for a jumbo (nonconforming) loan is similar to applying for a conforming mortgage, but requirements are typically stricter than with a conforming loan, as you can see above. We'll go over some of the specific jumbo loan vs. conforming loan requirement differences below. 

• Credit score: You may need a minimum credit score of 620 for a conventional loan and a 680 or better credit score for a jumbo loan. If you have a credit score at the low end of the qualifying range, you may get a higher interest rate for both loan types.

• Income: A higher loan amount means bigger monthly payments. Therefore, you must earn more money. You should be able to show predictable, regular income with both types of loans, but with a jumbo loan in particular, your lender will want to see evidence of enough income coming in on a regular basis.

• Down payment: Lenders will likely require more than 10% down on jumbo loans for 1-unit homes. You may need to put more down on second homes, investment properties and 2 – 4-unit properties. The down payment requirement may also be based on your loan amount and credit score as well.

• Debt-to-income (DTI) ratio: For most loans, including conventional loans, you’ll need to have a DTI of 50% or less, but the specific requirement depends on the type of mortgage you’re applying for. For a Jumbo Smart loan from Rocket Mortgage^®, you'll need a DTI of 45% or lower.

• Cash reserves: You usually need to have up to 6 months of cash reserves for a conventional loan and up to 12 months for a jumbo loan.

Talk to your lender about qualifications and the personal information you need to provide. Home buyers should share the following with the lender:

• Pay stubs
• Tax returns
• Bank statements
• W2 forms or 1099s

Note that jumbo loans sometimes go through a manual underwriting process before approval, so the process can take longer compared to a conforming mortgage.

Jumbo Loan Rates Vs. Conforming Mortgage Rates

Here's a common question when you're considering a jumbo loan: Are jumbo loan rates higher?

Your lender might charge more for jumbo loan rates vs. conforming rates because due to the fact that you're seeking a larger loan amount, there is more risk involved for the lender. However, this isn’t necessarily the case. Whether there’s a difference between the rates at all depends on market appetite for jumbo and conforming loan. Jumbo loans are very competitive with market rates. To the extent that the interest rate may be higher than with conforming mortgage loans, the difference between a jumbo vs. conforming loan ranges from just 0.25% – 1%.

Learn more about the differences between jumbo and conforming loans by reading the questions below.

Is a conforming mortgage better than a jumbo loan?

Conforming mortgages aren't "better" than jumbo loans. In fact, jumbo loans aren't worse than any other types of mortgages – they simply must fit your lifestyle and situation. However, it's important to realize that you may end up with a higher interest rate in some situations, though you must make sure you can afford the monthly payments.

How do I find a jumbo loan lender?

Many lenders and financial institutions offer jumbos loans, including Rocket Mortgage.

Are jumbo loan rates always higher than conforming loans?

Not all jumbo loans have higher interest rates.

Having a jumbo loan doesn’t mean you will automatically "get" a high interest rate. In fact, lenders are often more competitive with their jumbo mortgage rates than conventional loan interest rates. Your credit score, down payment amount, debt-to-income ratio and earnings will actually have a bigger impact on your rate than the loan amount you take out.

Some of the conditions that affect a jumbo loan’s interest rate include your credit score, LTV ratio, property type and occupancy type (whether you plan to purchase a primary residence or a secondary residence – you'll get a lower interest rate for a primary residence). You may also experience a rate increase if you choose to pay taxes and insurance on your own instead of putting them into escrow, where a third party holds your tax and insurance money until they must be paid.

How can I avoid a jumbo loan?

If you don't want to take out a jumbo home loan, you can consider alternatives. You may want to save for a larger down payment in order to avoid taking out a jumbo loan. If you currently own the property, and have enough equity, you could take out a home equity loan to fund enhancements to your house. 

Briefly, the downsides of a jumbo loan include the following: You'll borrow more money, have to come up with a higher down payment, must have a higher credit score, must prove higher income and must put more cash away on reserve.

On the other hand, the benefits of a jumbo loan include the opportunity to get more money from your lender. You can also usually get a competitive interest rate. You may also be able to get more land or a luxury home with a jumbo loan or buy a home in a more desirable neighborhood or area.

Finally, unlike typical conforming conventional loans, you won’t have to pay private mortgage insurance on our Jumbo Smart loans.

If the home you want to purchase doesn't fit within the conventional loan limits, all is not lost! In fact, many homes in certain pockets of the country don't fit within the parameters of the conforming loan limits of the FHFA. A jumbo loan can take over when you can't get a conventional mortgage.

However, jumbo loans work differently from conforming mortgages. Jumbo loans require stiffer requirements, larger loan limits and a stricter underwriting process.

Ready to learn more about financing a home or getting approved for a mortgage? Talk to a Home Loan Expert. You can also give us a call at (833) 326-6018.