Jumbo loan vs. conventional loan: What's the difference?

When buying a house, you may not be aware of the wide variety of loans available. As soon as you start talking with a lender, you may discover that you can tap into numerous options such as jumbo and conventional loans.

Let’s explore the key differences between jumbo versus conventional loans, including eligibility requirements for each. We’ll also look at the pros and cons to help you choose the right loan for your home financing needs.

Is there a difference in a jumbo loan vs. a conventional loan?

By definition, a conventional loan is any loan that isn’t government-backed, which includes jumbo loans. Most conventional loans are also “conforming” loans. Fannie Mae and Freddie Mac typically purchase conventional conforming loans. They are called conforming loans because they conform to Fannie Mae and Freddie Mac’s loan requirements.

Jumbo loans, on the other hand, are called “non-conforming loans” because they don’t fit within the loan limits set by the FHFA. In other words, jumbo loans are a home financing solution for properties priced beyond conforming conventional loan limits.

Jumbo loans usually come into play for large, luxury homes or properties in high-cost areas and competitive markets. They exceed the loan limits set by the Federal Housing Finance Agency (FHFA) for conventional loans.

What are conforming loan limits?

Every year, the FHFA puts a dollar limit on the mortgages Freddie Mac or Fannie Mae will buy or guarantee. Fannie Mae and Freddie Mac buy conforming loans from lenders and then repackage the mortgages into mortgage-backed securities to sell to investors on the secondary mortgage market. Fannie Mae and Freddie Mac provide stability in the mortgage market, which can help keep mortgage rates lower for consumers.

If you’re unsure which loan you should use, consider how much you’ll need to borrow to buy a home. A jumbo loan may be the right choice if the property’s price surpasses the FHFA’s conforming loan limit.

Jumbo and conforming loan comparison

Jumbo and conforming mortgages have more differences than the loan amount you can borrow. The eligibility criteria to qualify for a mortgage can vary by lender, loan amount, state law and your financial situation. Here’s a snapshot of the qualification requirements for each type of loan:

Jumbo loan requirements vs. conforming mortgage requirements

While the application process for a jumbo versus conforming loan is similar, jumbo loans typically have stricter loan requirements. Here’s more on the differences in requirements for jumbo loans versus conforming loans:

• Credit score: A conforming loan typically requires at least a 620 credit score. With a jumbo loan, you’ll need at least a credit score of 680. If your credit score is at the lower end of the qualifying range, you may qualify for these loans but pay a slightly higher interest rate.
• Income: A higher loan amount means larger monthly payments. Lenders will require proof of a stable and sufficient source of income(s), especially for a jumbo loan.
• Down payment: Lenders will likely require a down payment of 10% or more on jumbo loans for one-unit homes. They may require higher down payments for second homes, investment properties and two- to four-unit properties. Jumbo loan down payments are typically higher. Your loan amount and credit score can influence the size of your down payment.
• Debt-to-income ratio (DTI): For most conforming conventional loans, you need a DTI ratio of 50% or less based on the mortgage you’re applying for. The typical qualifying DTI ratio for a jumbo loan is 45%. Rocket Mortgage^® offers the Jumbo Smart loan, which also requires a DTI ratio of 45% or lower.
• Required reserves: You usually need up to 6 months of cash reserves for a conforming loan and up to 12 months for a jumbo loan.

Required loan documents

Talk with your mortgage lender about loan qualifications and any personal information you must submit. Home buyers typically provide lenders with recent:

• Pay stubs
• Tax returns
• Bank statements
• W-2 forms or 1099s

Jumbo loans sometimes require manual underwriting, a deeper review of your finances by an underwriter, before approval. This extra step can lengthen the process, making the loan processing time longer for a jumbo loan than a conforming loan.

Mortgage rates for jumbo vs. conforming loan

Conventional wisdom says your lender will likely charge higher rates with jumbo loans versus conforming loans because they’re for larger loan amounts – and the larger the loan, the riskier it is for the lender. However, this isn’t always the case.

The difference in interest rates can depend on market demand for jumbo and conforming loans. If jumbo loan rates are higher than conforming mortgage loan rates, the difference is usually between 0.25% – 1%. Your overall financial health and credit profile can also heavily influence your rate.

Jumbo and conforming loan FAQs

Learn more about the differences between jumbo and conforming loans from the answers to these frequently asked questions.

Is a conforming mortgage better than a jumbo loan?

Conforming mortgages aren’t better than jumbo loans, and vice versa. Jumbo loans also aren’t worse than any other type of mortgage. They simply cater to a specific need, financing luxury properties or homes in high-cost areas. However, jumbo loans typically have higher interest rates. You must feel confident about your ability to afford the monthly payments.

How do I find a jumbo loan lender?

Many lenders and financial institutions offer jumbo loans. To expertly navigate the process, choose a lender that will assist you throughout the entire loan process, from application to closing. The Home Loan Experts at Rocket Mortgage are happy to help you find the best jumbo loan option for your needs.

Are jumbo loan rates always higher than conforming loans?

Getting a jumbo loan doesn’t automatically mean paying a high interest rate. Lenders are often more competitive with jumbo mortgage rates than conventional loan interest rates. Your credit score, down payment, DTI and income will have a bigger impact on your rate than the size of the loan.

What factors will influence my jumbo loan interest rate?

Factors such as your credit score, loan-to-value ratio (LTV), property type and occupancy (primary residence or second home) will influence a jumbo loan’s interest rate. A lender may increase your rate if you pay property taxes and homeowners insurance directly rather than use an escrow account.

How can I avoid a jumbo loan?

You can potentially avoid a jumbo loan by saving for a larger down payment. By saving more, you reduce the amount you need to borrow. You can also avoid applying for a jumbo loan by looking at less expensive properties you can finance with a conforming loan.

The bottom line

If the home you want to purchase doesn’t fit within the conforming loan limits, all is not lost. Many homes in certain pockets of the country don’t fit within the parameters of the FHFA’s conforming loan limits. In this scenario, a jumbo loan – with its larger loan limit – can help.

However, jumbo loans have different qualification requirements and a stricter underwriting process than conforming loans.

Not sure what type of loan you qualify for? Start your mortgage application online or call us at (833) 326-6018 to uncover more financing options.