Details to Know: Jumbo Loan vs. Conventional Loan

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Details to Know: Jumbo Loan vs. Conventional Loan

Both types of loans have their advantages, so speak with a mortgage lender about your options. They will choose the ideal loan as per your needs.

The two most popular ways for consumers to get loans to purchase houses are jumbo mortgages and conventional financing. Both mortgages need applicants to fulfill specific criteria, including minimum credit score requirements, income levels, debt-to-income ratios, and down payments. Mortgage lenders will also have different guidelines for each program. But before that, it is essential to know that both are also mortgages available from various lenders, but some key differences set them apart.

What is a Jumbo Loan?

A jumbo loan is a mortgage planner to finance luxury homes or those in highly competitive real estate markets. They are typically used by borrowers who cannot make a large down payment on their homes. Jumbo loans can be either fixed-rate or adjustable-rate mortgages (ARMs). In addition, some states have specific loan limits, and jumbo loans are known as loans that exceed these limits.

These loans are riskier for lenders than standard loans since their higher limits make them more difficult. Borrowers should also be able to satisfy more robust criteria for approval. Jumbo loans have certain benefits over standard ones in some circumstances.

For example, if you buy a home in an area with a high cost of living, or if the home you are interested in is significantly more expensive than others in the neighborhood, a jumbo loan may be your only option.

Jumbo Loan Requirements

Proof of income: Prepare two years' worth of tax documentation or similar proof to show that you have a constant and steady source of income. Lenders will also want to know if you have enough liquid assets to cover six months' worth of mortgage payments.

Credit score: Borrowers with a credit score of at least 700 have the best chance of getting approved for a jumbo loan.

DTI ratio: The maximum debt-to-income ratio for jumbo loan approval is usually 45%, but some lenders will allow ratios up to 50%.

Down payment: Jumbo loans require at least 20% down payments, but some lenders may lower 10%.

What is a Conventional Loan?

A mortgage that has not been backed by the federal government is referred to as a conventional loan. A straightforward loan or mortgage is any sort of loan that isn't an FHA, VA, or USDA loan but is provided and issued by private lenders such as banks, credit unions, and mortgage companies.

Conventional loans are divided into two types: conforming and non-conforming. Conforming loans are those whose size is determined by the FHFA, which regulates their underwriting standards. The criteria for these standards are determined by a borrower's credit score and history, debt-to-income ratio, loan-to-value ratio (LTV), and one other major aspect: the size of the loan.

Conforming loan limits are updated yearly to keep up with the average cost of a house in the United States. For example, the national maximum for conforming conventional loans in 2022 is $647,200 per single-unit dwelling, compared to $548,250 in 2021.

Conventional loans, like jumbo ones, have several requirements. You must have a down payment, a minimal credit score, a specific income level, and a low DTI ratio. Before a lender accepts you for a conventional mortgage, you'll generally need a credit score of at least 620.

However, not all conventional loans follow these standards, and those that don't are known as non-conforming loans. These are typically more difficult than conforming loans since they are not backed by the government or Fannie Mae or Freddie Mac.

So, they have higher interest rates and may require a larger down payment. Also, non-conforming loans tend to be more expensive since they are not as standardized as conforming ones.

Jumbo vs. Conventional Loans: How Much Do They Cost?

In the past, jumbo loans had much higher interest rates than conventional mortgages. However, they are still somewhat greater. The gap has been narrowing. You may even come across jumbo rates that are less expensive than conventional rates. A mortgage calculator may show you how changing interest rates will affect your monthly payment.

In addition, Jumbos may be more expensive in various other ways. For example, requirements for down payments have increased to as much as 30% of the home purchase price at one point; however, today's jumbo loans typically require a down payment of 15% to 20%, more significant than the 10% to 15% that some conventional loans require. Higher interest rates and down payments are generally used to offset the greater risk of jumbos since Fannie Mae or Freddie Mac does not guarantee them.

Closing costs for jumbo mortgages are usually more expensive than standard loans.

Lenders also demand more from jumbo borrowers. Their credit ratings must be higher (preferably above 700), their DTIs lower, and their bank account balances must cover 12 months' worth of house payments—nearly double the requirement for conventional mortgage customers. Put another way, jumbo loan applicants must have few debts and many liquid assets.

Here's a comparison of jumbo and conventional mortgage phrases.

Maximum Loan Amount

Conventional Loan: $647,200 to $970,800 depending on the local house prices.

Jumbo Loan: The total cost will vary based on your credit score and other financial factors. It might be a few hundred thousand dollars or more. But, again, this differs from one lender to the next.

Minimum Down Payment

Conventional Loan: 3% to 20%

Jumbo Loan: Normally 10% to 20%

Private Mortgage Insurance (PMI) Required?

Conventional Loan: Yes, if the downpayment is less than 20%

Jumbo Loan: Normally, yes, if the downpayment is less than 20%

Minimum Credit Score

Conventional Loan: 620

Jumbo Loan: Frequently 680-740

Maximum (DTI)

Conventional (Conforming) Loan: Typically, 43%

Jumbo Loan: Typically, 45%

Required Cash Reserves

Conventional Loan: 0 to 6 months in savings for homeownership expenses.

Jumbo Loan: Maximum of 12 months in savings for homeownership expenses.

Eligible Types Of Property

Conventional (Conforming) Loan: 1-4 unit properties, which include investment properties, vacation homes, and primary residences

Jumbo Loans: Broad range. Some lenders have their limitations.

Read here to know how to refinance an FHA loan to a conventional loan.

The Bottom Line

Both jumbo and conventional loans can be beneficial, depending on your financial needs and qualifications. For example, if you need a loan for a high-priced home or are self-employed, a jumbo loan may be the right choice. And, if you have good credit and earn a steady income, a conventional loan could help you save money on interest. Ultimately, the best way to decide which type of loan is right for you is to discuss with a mortgage lender about your options. They will assist you in selecting the best loan for you.