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

Once you start the homebuying process, you’ll quickly learn there are many different types of loans you can choose from. The biggest difference between a jumbo loan and a conventional loan is the amount you’re borrowing. Conventional loans stay within specific limits, while jumbo loans are larger to finance more expensive properties.

In this guide, we’ll walk you through how jumbo vs. conventional loans compare, when a jumbo loan makes sense, and what it takes to qualify. This information should help you determine which one fits your financial goals.

Key Takeaways:

• A jumbo loan is a type of non-conforming loan since it exceeds the conforming loan limits set by the FHFA.
• Conventional loans aren’t guaranteed by a government agency and are either conforming or non-conforming.
• Jumbo loans have more stringent down payment, credit, and documentation requirements than conventional loans.

What is the difference between a jumbo loan and a conventional loan?

A conventional loan is any mortgage that isn’t guaranteed by a government agency. Examples of loans guaranteed by government agencies are a USDA loan or a VA loan. Conforming loans can either be conforming or non-conforming. A conforming loan meets loan limit amounts set by the FHFA and is eligible for purchase by Fannie Mae or Freddie Mac.

Non-conforming loans don’t meet these guidelines, often because they exceed the loan limits. Jumbo loans are a type of non-conforming loan since they exceed the loan limits. Because they aren’t backed by Fannie Mae or Freddie Mac, non-conforming loans are riskier for lenders.  

What are conforming loan limits?

Every year, Fannie Mae, Freddie Mac, and their regulator, the Federal Housing Finance Agency (FHFA), set a maximum amount for loans they buy from lenders. Fannie Mae and Freddie Mac are government-sponsored enterprises (GSE) that set down payments, credit scores, and documentation requirements for mortgages.

Fannie Mae and Freddie Mac buy conforming loans from lenders, giving those lenders the liquidity to originate more loans. The GSEs then pool these mortgages together and convert them into mortgage-backed securities (MBS). The MBS are then issued and sold to investors.

The FHFA sets these limits to ensure most homebuyers can access affordable conventional mortgages. Loans that exceed these limits are called jumbo mortgages, and the cost of obtaining one may be higher than conforming mortgages. These loans can also come with stricter lending requirements.

Jumbo and conforming loan comparison

The most notable difference between jumbo and conforming loans is the loan amount, but these two mortgages have several other differences. The table below highlights some of the main requirements for each loan type.

Jumbo loans vs. conforming mortgages: Key differences

Though the application process for jumbo and conforming loans is similar, there are several important differences between these two loans:

• Credit score: Jumbo loans are riskier for your lender, so they usually have higher credit score requirements. Conforming loans have a minimum credit requirement of 620, but jumbo loans typically need a credit score of 700 or higher.
• Income: You’ll also need a higher income to qualify for a jumbo loan than a conforming loan. The specific requirements vary depending on your lender, but in general, you’ll need to prove you can afford the monthly mortgage payments.
• Down payment: You can qualify for a conforming loan with a down payment as low as 3% of the total loan amount. But jumbo loans often require a down payment between 10% and 25%, depending on your financial situation.
• DTI: Your debt-to-income (DTI) ratio helps your lender determine whether you can meet all of your financial obligations, including your mortgage. Conforming loans allow for a maximum DTI ratio of 50%, but you’ll need a DTI ratio of 43% or lower to qualify for a jumbo loan.
• Required reserves: Having a cash reserve allows you to continue making your mortgage payments even if you go through financial challenges. Most conforming loan lenders look for a cash reserve of up to six months, but you may need to show up to 12 months for a jumbo loan.
• Closing costs: Jumbo loans also come with higher closing costs, and your lender may require a second home appraisal, though there are some exceptions. For example, Jumbo Smart loans from Rocket Mortgage® don’t require a second appraisal.   
• Mortgage rates: Jumbo loan mortgage rates are typically higher than rates for conforming loans since they aren’t backed by Fannie Mae or Freddie Mac.

How are mortgage rates for jumbo loans determined?

Jumbo loan rates don’t follow the same rules as conventional mortgages. Because jumbo loans exceed conforming loan limits, lenders take on more risk, which plays a big role in how rates are set. Factors like your credit score, down payment, debt-to-income ratio, and even the size of the loan all influence the rate you receive.

Lenders also look at market conditions and their own internal guidelines, which can vary from one lender to the next. Since jumbo loans are more customized, shopping around and comparing offers is the best way to find competitive rates.

Required loan documents

All mortgage applications require paperwork, but jumbo loans require a more thorough verification process than conventional loans. Lenders want a full picture of your financial situation to determine how much you can afford to borrow.

You should expect to provide the following documents:

• Pay stubs from the past 30 days
• Tax returns from the last two years
• Bank statements for any checking, savings, and investment accounts
• W-2 forms (for employees) or 1099s (for freelancers and contractors)

Jumbo loans require manual underwriting, which means an underwriter must review your documentation. This allows the lender to assess your financial situation and ask follow-up questions or request additional documents as needed.

FAQ

Jumbo loans can be used for a variety of purposes, including primary residences, vacation homes, and investment properties. If you have more questions about how jumbo loans work, you might find the following information helpful.

Is a conforming mortgage better than a jumbo loan?

A conforming mortgage isn’t necessarily better than a jumbo loan. It just meets specific loan limits set by the Federal Housing Finance Agency (FHFA). Conforming loans often come with lower interest rates and more flexible approval standards, but jumbo loans are ideal if you need to borrow more than the conforming limit. The best type of mortgage depends on your financial situation and how much you can afford to spend on a house.

How do I find a jumbo loan lender?

You can apply for a jumbo loan lender with most major banks, credit unions, and online mortgage lenders. Many of these financial institutions offer both jumbo loans and conventional mortgages. It’s important to compare quotes from multiple lenders since rates, fees, and underwriting standards can vary.

Are jumbo loan rates always higher than conforming loans?

Jumbo loan rates are usually higher than conforming loan rates, but not always. Since jumbo loans aren’t backed by Fannie Mae or Freddie Mac, lenders take on more risk, and that risk can be reflected in the interest rate you receive. However, strong credit, a large down payment, and a low debt-to-income ratio can help you secure a competitive interest rate.

What factors will influence my jumbo loan interest rate?

Several factors can affect your jumbo loan interest rate, including your credit score, loan amount, down payment, and debt-to-income ratio. Lenders may also adjust your rate based on whether you choose to pay property taxes and homeowners insurance through an escrow account. Market trends and individual lender policies also play a role, which is why shopping around is so important.

How can I avoid a jumbo loan?

You can avoid a jumbo loan by keeping your mortgage amount within the conforming loan limits set by the Federal Housing Finance Agency (FHFA). One way to do this is by making a larger down payment so the amount you borrow falls under the limit. You can also consider buying a less expensive home or choosing a property in a lower-cost area.

The bottom line: Rocket Mortgage^® can help

If the mortgage amount you’d like to borrow falls within local conforming loan limits, a conventional mortgage is generally the simplest and most cost-effective option. But if you’re purchasing a high-value property or buying in an expensive housing market, you may need a jumbo loan to access the funds you need.

Jumbo loans come with more stringent borrowing requirements and a longer approval process but allow you to finance a larger home purchase. Just keep in mind that they may have slightly higher interest rates and require a stronger financial profile.

If you’re not sure how much home you can afford, you can use a mortgage affordability calculator to estimate your budget. And if you're still unsure which loan option is right for you, Rocket Mortgage^® is here to help. Contact us today to explore your loan options and find a mortgage that fits your goals.