Do you want to purchase a home? Before considering your new residence, consider how much you can afford and the kind of mortgage you’ll need. A standard conventional mortgage is the best option. However, what if you wish to purchase a costly house? You might want a jumbo mortgage for that.
Large loans that exceed the federal borrowing limit are known as jumbo mortgages. Although these loans can have reasonable interest rates, they are usually more challenging to qualify for than conventional loans. If you want more details about their differences, stick with us.
Overview of Conventional Loans vs. Jumbo Loans
Simply put, a conventional loan is a mortgage created, financed, and guaranteed wholly by a private lender rather than supported by the federal government. There are two types of conventional mortgages: conforming and nonconforming. The former is a mortgage that satisfies the Federal Housing Finance Agency’s (FHFA) regulations, the most prevalent of which is that the loan size be set at or below specific dollar restrictions. States and even counties inside states have different boundaries.
The conforming loan ceiling for 2024 is $766,550 in most regions; it can reach $1,149,825 in more expensive areas.
Jumbo loans are similar to conventional loans. However, it is deemed “nonconforming” because of its size, which prevents it from meeting FHFA criteria. You will require a jumbo loan if you purchase a more expensive property than your neighborhood’s average. As a result, even though the amount you need for the purchase exceeds the conforming loan size, you can still borrow it.
Jumbo loans up to $3 million or $5 million are available from many mortgage companies. If you engage with a mortgage broker specializing in jumbo loans, you may find jumbo loans in even more significant amounts.
Jumbo vs. Conventional Loans: A Comparison
Jumbo loan interest rates used to be significantly higher than those of regular, typical mortgages. They still tend to be slightly higher, even if the margin has narrowed. Some jumbo rates are less expensive than regular rates.
Using a mortgage calculator, you can see how various rates affect your monthly payment.
However, jumbos can be more expensive in other ways. Although it is now more typical to see jumbo loans requiring a down payment of 15% to 20%, the down payment requirements are more stringent and have previously reached as high as 30% of the home purchase price.
It is 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). “Let FHA Loans Help You.” U.S. Department of Housing and Urban Development.
Since jumbos are not guaranteed by Fannie Mae or Freddie Mac, the higher interest rates and down payments are often implemented solely to balance the higher level of risk involved. Due to their size, jumbo mortgages frequently have more outstanding closing fees than standard mortgages.
Lenders also have higher expectations for jumbo borrowers. Their bank account balances must cover a year’s homeownership expenses, their DTIs must be lower, and their credit ratings must be higher (ideally above 700)—nearly twice as much as those of conventional mortgage borrowers. As stated differently, those who have significant cash assets and low obligations are anticipated to be jumbo mortgagors.
Comparison Chart of Conventional and Jumbo Loans
Aspects | Jumbo Loans | Conventional Loans |
Least credit score | 700 | 620 |
Least down payment | 20-25% | 3-5% |
Minimum DTI ratio | 36-43% | 43-50% |
Cash reserves | Up to 12 months | Up to 6 months |
Closing costs | 2-5% of the loan amount | 2-5% of the loan amount |
Rates | Higher due to elevated risk | Can be less, depending on your financial profile |
How To Qualify For Conventional Loans vs. Jumbo Loans
Your credit score is the most significant qualifying criterion determining whether you are eligible for a jumbo loan (as opposed to a standard loan). The minimum acceptable amount for a jumbo loan is 700, while the conventional loan is 620. Additionally, consumers with credit scores of 740 or above receive the most excellent mortgage rates, even though you can qualify with a minimal score.
Additionally, you should be ready to meet the lender’s debt-to-income (DTI) requirements, which are usually lower (i.e., take up less of your monthly wages), and make the minimum down payment, which is, predictably, usually a more significant percentage of the purchase price.
In addition to the significantly more significant down payment and credit score requirements, you will require substantial cash reserves or other financial assets. You’ll need a higher salary since you’re looking for a more significant loan amount.
Benefits Of Jumbo Loans
The property price you plan to purchase may be enough to determine whether you require a jumbo loan. However, consider these benefits of jumbo loans if you’re shopping at a price range where you might find yourself on either side of the local conforming loan limit.
Potentially Cheaper Interest Rates
Because lenders may be prepared to compete on rates to gain a particular client, jumbo loans occasionally have lower interest rates than conforming loans.
Capacity to Borrow More Money
If you live in an expensive neighborhood, you may need a jumbo loan to buy a home. A larger loan eliminates the need for a down payment sufficient to meet the cost of your mortgage with a conforming loan.
Loan Options
Jumbo loans come in a variety of forms. Your term and preference for a fixed or adjustable rate are up to you. You may be eligible for a Jumbo VA loan if you are a current or past service member.
Benefits Of Conventional Loans
Here are the most common benefits you can take if you are thinking of getting conventional loans:
Minimal Down Payment
Conventional loans can also be a good option for buyers with limited funds, even though government-backed loans are mainly recognized for their low down payment options. Homebuyers can apply for conventional loans with as little as 3% down. Known as a Conventional 97 or 97 Percent Loan-to-Value Mortgage, it aims to increase the number of first-time homeowners who can obtain conventional loans.
Larger Loan Limits
Due to the need for government participation, conventional loans often allow you to acquire more funds. For high-cost areas, the current maximum amount for an FHA loan, one kind of government-backed loan, is $1,209,750. However, if your credit score is strong enough in certain areas, you can borrow up to $2 million for a traditional loan.
Reduced or No Payments for Mortgage Insurance
The flexibility of conventional loans for private mortgage insurance (PMI) is one of their main advantages. If you have less than 20% equity in your house, you must pay an additional fee on your monthly payment to help your lender cover the risk. Generally speaking, government-backed loans, ideal for borrowers with small down payments, come with mortgage insurance and may even need it for the duration of the loan, even when you have more than 20% equity.
Quicker Access to Your Loan Amount
If government organizations are removed from the process, there will be less red tape in completing your mortgage. Less documentation will need to be submitted, and fewer people will need to review every detail before you can close. This means that conventional loans typically close more quickly than their non-conventional equivalents.
Variable Interest Rates
Interest rates on conventional loans may be more adjustable, mainly if your credit history is solid. Additionally, there are fewer additional expenses associated with these loans, including origination fees or mortgage insurance. Your total annual percentage rate (APR), the yearly cost of your loan, including interest and expenses as a proportion of your entire loan amount, will typically be lower than with a government-backed loan because these are typically lower than government-backed loans.
How to Choose The Best Loan For You
Conventional Loans vs. Jumbo Loans both are serve distinct functions, so it’s critical to select the best one for your specific needs and financial requirements. A few factors must be taken into account when comparing a jumbo loan to a standard mortgage.
In one of the following circumstances, a conventional loan might be a preferable choice:
- You are paying inside the local loan limitations for a moderately priced home.
- Your income is lower.
- Your credit score is only “fair” or “good.”
- You do have a few assets or savings.
- You only have a little money for a down payment.
If you fit some of these requirements, you may be eligible for a jumbo loan:
- By local standards, the house you’re buying is luxurious.
- You’re buying a house in a place where living expenses are high.
- You make a lot of money and have a great credit score.
- You have a small monthly debt load (about your income).
- Although you must finance, you can put down at least 20%.
Bottom Line
In the end, there is typically no difference between conventional and jumbo loans. You can obtain a conventional or conforming loan if you borrow within the local lending limitations. Additionally, you will receive a jumbo loan if the total amount of your loan exceeds that cap.
Indeed, there are instances when jumbo loan rates are greater than those for conventional loans. However, that is only sometimes the case.
Like any mortgage, you can shop around among lenders to get the best rate. Additionally, conventional and jumbo loan customers can take advantage of favorable offers because mortgage rates are currently at all-time lows.
If you are ready to get started, do not forget to review this blog: Non-QM Loans Explained: A Guide to Non-Traditional Mortgages
FAQs
Can a jumbo loan be converted into a regular loan?
Refinancing a jumbo loan into a standard loan is feasible. The conforming loan maximum, which is $766,550 for 2024 (or up to $1,149,825 in high-cost locations), must be met or less than the jumbo’s existing amount.
Do jumbo loans require mortgage insurance?
Most lenders require a down payment of at least 20% to obtain a jumbo loan. As a result, mortgage insurance is optional.
Are jumbo loans more complex to approve than regular loans?
Due to their larger loan amounts, jumbo loans have stricter lending requirements. Additionally, because they are more challenging to sell on the secondary mortgage market, they represent a higher risk to lenders than traditional loans that meet FHFA guidelines.