For any home buyer, navigating the mortgage loan process can often be difficult, but it doesn’t have to be. The first step is learning about each option and deciding which is right for you. Jumbo and conventional loans are two types of mortgage financing options that buyers frequently use.
We’ve created this guide to define the key differences of jumbo vs. conventional loans. Read on to learn more about the more about various requirements, how to qualify, and tips on how to select the best option for your home buying process.
What Is a Jumbo Loan?
Jumbo loans are common with home buyers interested in purchasing an expensive or luxury home or are looking to obtain a large mortgage in a highly competitive market. Those interested in a jumbo loan should be in a high-income earning bracket and have a credit score of 700 or more. Jumbo loan interest rates and down payments are typically higher than conforming loans. Requirements are stricter because of the high risk, which may make it more challenging to qualify for.
How Does a Jumbo Loan Work?
A jumbo loan is a smart option if a buyer wishes to finance a single-family home that exceeds the maximum loan limit set by Fannie Mae and Freddie Mac (supervised by the Federal Housing Finance Agency ‘s [FHFA]) maximum loan limit. Citation
There are many benefits of a jumbo loan, including:
- Competitive interest rates
- Fixed or variable interest rates
- No private mortgage insurance (PMI)
What Is a Conventional Loan?
Conventional mortgage loans are traditionally the most common type of loan used by home buyers. Backed by Fannie Mae and Freddie Mac, this type of loan is offered by lenders like banks, credit unions and mortgage companies. If you have good credit with available funds for a down payment, a conventional loan can be an incredibly affordable option for long-term homeownership.
How Does a Conventional Loan Work?
There are two types of conventional loans, conforming or non-conforming. Conforming loans are backed by Fannie Mae and Freddie Mac and may be easier to get approved. Non-conforming loans are not backed by the government but may be a more affordable option.
With a conforming loan, limits are set by the FHFA and are adjusted annually to align with the changing housing market. The 2021 loan limit for a one-unit property is $548,250, an increase from $510,400 in 2020.Citation They are increasing again in 2022 up to a base of $625,000.Citation Conforming loans follow government guidelines, including those related to down payment, credit score, loan limit and debt-to-income ratio (DTI). Home buyers who are approved for a conforming loan can choose between 15-year, 20-year and 30-year mortgages. The length of the loan selected will directly impact the amount of interest paid.
A non-conforming loan is a type of conventional loan that does not coincide with the set guidelines described above. Since they aren’t backed by the government, non-conforming loans tend to be more difficult to qualify for, but often cost less than conforming loans. The eligibility and terms of the load are at the discretion of the lender and may vary.
How to Qualify for a Jumbo Loan vs. a Conventional Loan
In general, a jumbo loan will have higher interest rate than a conventional loan. However, if you can prove that you are a high-income earner with definitive capability of paying back your loan, some lenders may deem you as lower risk and thus provide you with a comparable interest rate to a conventional loan.
Jumbo Loan Requirements Include:
- Excellent credit score
- Low DTI ratio
- Significant cash reserves
- High income
- Large down payment
Conventional Loan Requirements Include:
- High credit score
- Reasonable DTI ratio
- Some cash reserves
Both options include the option of a fixed or adjustable-rate mortgage. Fixed-rate mortgages maintain a fixed interest rate for the life of the loan and offer predictable payments. Adjustable-rate mortgages have a convertible interest rate and allow buyers to start with a lower monthly payment, and then adjust the rate yearly based on a performance index after the initial fixed period of 3 to 10 years.
Recap: The Differences Between Jumbo Loans and Conventional Loans
| Requirement | Jumbo Loan | Conventional Loan |
| Property type | Luxury home or property located in highly competitive area | Primary home, second home, investment properties |
| Loan Limit | None | $548,250 in most counties |
| Minimum down payment | At least 10%; some lenders may require up to 30% | As low as 3% |
| Minimum credit score | 700 | 620 |
| Mortgage insurance | None | Required if down payment is less than 20% |
| Debt-to-income ratio | Maximum 36% | Maximum 45 – 50% |
| Cash reserves | 6 to 12 months’ worth of monthly payments available | No set requirement |
When Should You Consider a Jumbo Loan Over a Conventional Loan?
If you are a borrower who needs a loan that is higher than the government set limits, you should consider a jumbo loan over a conventional loan.