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Jumbo vs. conventional loans

Are you looking to buy a house? Before you start daydreaming about your new home, you need to consider which type of mortgage you're going to use to buy it. You could opt for a regular conforming mortgage. But what if you want to buy an expensive home? For that, you probably need a jumbo mortgage.

Jumbo mortgages are large loans that fall above the federal loan limit. These loans are typically harder to qualify for than conforming loans, but they can offer competitive interest rates. They’re also a convenient way for borrowers to secure the money they need to purchase expensive homes.

Jumbo vs. conforming loan: what's the difference?

From big and small to high-interest and low-interest, mortgages come in all shapes and sizes. The two most common types are jumbo, or non-conforming, and conforming. To understand the difference between the two, let's touch on federal loan limits.

The Federal Housing Finance Agency (FHFA) sets conforming loan limits annually. Loan limits determine whether mortgages are eligible for purchase by Fannie Mae and Freddie Mac. Mortgages that fall within these limits are considered conforming. Mortgages that fall outside these limits are considered non-conforming.

The government uses two businesses — Fannie Mae and Freddie Mac — to purchase conforming mortgages. That makes regular mortgages less risky for lenders to issue. But what happens when you need a house that costs more than the limit?

Some lenders will let you take out a jumbo mortgage. These are non-conforming mortgages used to finance homes over the FHFA loan limit. These mortgages are typically kept by the lender and are not guaranteed or insured, which makes them riskier. Every jumbo lender will have its own standards for making these loans.

Qualifying for a jumbo mortgage

The qualification process for a jumbo loan is similar to the conforming loan process. The lender will review your assets, income and credit score, but there are some differences. Jumbo loans are harder to qualify for than conforming loans since lenders take on extra risk with jumbo loans. Because of this, lenders are looking at several key factors to determine your risk level. Generally, this means higher credit, income and cash reserve requirements.

Here are some of the main qualification differences between jumbo and regular mortgages.

  • Credit score: Credit scores are proof of your past ability to make payments on-time. You may be able to score a conventional loan with a good credit score. But you probably won't be able to get a jumbo loan with anything under excellent. It's not uncommon for jumbo loans to require a higher credit score.
  • Reserves: Most lenders look at reserves when approving you for a jumbo loan. These reserves help safeguard lenders from defaults.
  • Down payment: Whether conforming or jumbo, you need to make a down payment on your mortgage. Often, jumbo loans require larger down payments than conventional loans. It's not uncommon for lenders to expect a minimum of 20% down payment for jumbo loans.
  • Income: You may need a higher income to qualify for a jumbo loan. Typically, this is just a matter of math. You need enough income to repay the loan amount and jumbo loans are larger.
  • Debt-to-income ratio: Your debt-to-income ratio (DTI) is important. It lets lenders know you're able to pay all your monthly payments, not just your mortgage. Car payments, credit card bills and other debts can quickly impact your ability to repay a mortgage. Your DTI helps lenders understand what types of debts you're currently paying, and what you can afford to take on. The FHFA suggests that lenders keep DTI under 43%. However, jumbo loans may require a lower DTI.
  • Loan-to-value ratio: Jumbo loans also have stricter loan-to-value (LTV) ratio requirements than conforming loans. Your LTV is a measure of how much money the property is worth vs. the loan amount. To calculate your LTV, take your total mortgage amount and divide it by the appraised value or purchase price of the property, whichever is lower. Jumbo loans may require you to have an LTV of 80% (i.e., the loan is only for 80% of the price of your home). Some lenders may require an even lower percentage.

Closing costs on jumbo loans

Simply put, jumbo mortgages have higher closing costs than normal mortgages. There’s a lot more to assess and those extra qualification steps take time.

As well as higher closing costs, you may also need to pay for a second home appraisal. Lenders do this to offset some of their risk. Make sure you’ve considered all the closing costs, as well as the down payment and cash reserves you’ll need to have on hand before applying for a jumbo mortgage.

Jumbo mortgage rates

Taking out a jumbo mortgage doesn't immediately mean higher interest rates. In fact, jumbo mortgage rates are often competitive and may be lower than conforming mortgage rates. It ultimately depends on the lender and the market conditions. But, if lenders are able to provide jumbo mortgages, they’ll usually keep their rates competitive.

Interest rates aren’t only related to market conditions. Factors like your credit score, down payment, cash assets and income can impact the interest rate you’re offered. Jumbo loans are available in fixed and adjustable rates, and your rate may vary depending on the lending institution.

In a nutshell, taking out a jumbo loan doesn't mean taking out jumbo interest rates. You may even find jumbo rates are lower than conventional rates.

Summary of jumbo vs. conforming loans

Jumbo mortgages are loans issued for amounts over the FHFA loan limit. They are riskier for lenders to issue since they aren't insured by the government. Jumbo loans:

  • May require high credit scores
  • May require high cash reserves
  • May require a larger down payment (20% or more)
  • May require a lower DTI than conventional mortgages
  • May require an LTV of 80% or lower
  • Are available in both fixed and variable rates
  • Can have competitive interest rates
  • May have higher monthly payments
  • May have higher closing costs

Conforming mortgages are loans that are within the FHFA loan limit. These are less risky for lenders since they are owned by Fannie Mac or Freddie Mact. Conforming mortgages:

  • May require a lower credit score than jumbo mortgages
  • May not require cash reserves
  • May allow a lower down payment
  • May allow a higher DTI than jumbo loans
  • May allow a higher LTV than jumbo loans
  • Are available in both fixed and variable rates
  • Can have competitive interest rates, depending on the lender
  • May have lower monthly payments than jumbo loans
  • May have lower closing costs than jumbo loans

Which type of loan should I choose?

It depends! If you're looking to purchase a high-value home, you probably want a jumbo mortgage. If you're looking to buy a lower-value home, you probably want a conforming mortgage. Here are some things to keep in mind.

You might want a jumbo mortgage if:

  • You're financing a luxury home.
  •  You're financing a home in a high-cost area.
  • You have a strong credit rating.
  • You have a high income.
  • You want to purchase a high-cost vacation home.

You might want a conforming mortgage if:

  • You're financing a home under the loan limit.
  • You have a decent credit rating.
  • You have a low-to-moderate income.

Do you qualify for a jumbo loan?

Like any type of mortgage, jumbo mortgage approvals happen on a case-by-case basis. While it's safe to say that it's more difficult to qualify for a jumbo mortgage than a traditional mortgage, having a few missed payments on your credit history or a lower savings account balance may not automatically prevent you from getting a jumbo mortgage.

Everyone’s financial situation is unique. Talk with a Home Lending Advisor to learn about what options you have. You can also check out our free mortgage calculator to get a better picture of jumbo mortgage payments. Or, if you're ready to buy that dream house, you can apply for a jumbo loan today.