Jumbo Vs Conventional Loans: Unveiling the Differences

If you’re looking to buy a home in the USA, you have multiple loan options to aid you financially. Among these loan options are jumbo and conventional mortgages. You can receive These two types of loans outside government programs. However, some refer to jumbo loans as conventional loans. So, it’s difficult to choose which you need to buy your new home or which criteria you need to meet to qualify for them.

In this blog, we’ll explore jumbo vs conventional loans so as to answer the above questions and determine if there’s a difference between them.

What Are Jumbo and Conventional Loans?

Jumbo and conventional loans are mortgages that you can use to purchase a home. Private financial institutions give them out and underwrite them. They’ll give you a portion of the cost of the house you wish to purchase after they have ensured you meet their requirements, which include a minimum credit score. Additionally, the loan amount may change due to other factors, such as paying a certain percentage of a down payment, having a low debt-to-income ratio, or having a high credit score.

Financial institutions offer jumbo loans for you to buy houses that are expensive or are in expensive areas. Meanwhile, you can use conventional loans to buy an average-priced home. Therefore, their differences come from their purpose.

Loan Amount

Since the jumbo loan gives you the means to buy much more expensive homes than conventional loans, they give out larger amounts. In fact, they can even be as large as $5,000,000 since they’re based on the amount the financial institution believes you can repay. In addition, their lower limit is the upper limit of conventional conforming loans.

However, conventional loans usually offer smaller amounts. In particular, 2024 conventional conforming loans have a limit of $766,550 in most areas for single-family homes.

Requirements

When you consider jumbo loans vs conventional loans, a major difference you’ll notice is the requirements and criteria you need to meet to receive these loans. However, different institutions will set their own criteria.

You can expect the following requirements for jumbo loans since they’re taking on more risks:

• High Credit Score: You’ll need an excellent credit score of above 700 because it’s an indication that you make good financial decisions. Hence, you’ll be able to repay them.
• Proof of High Income: To receive the jumbo loan, you need to show that you have an income flow that can support paying back the loan.
• Low Debt-to-Income Ratio: Financial institutions will only offer a jumbo loan if you have little debt compared to your income. At most, you can have a ratio of 43%.

Conversely, conventional loans have these requirements:

• • High Credit Score: Usually, financial institutions will require you to have a credit score of 620 or above to give you a conventional loan.
  • Low Debt-to-Income Ratio: When you’re applying for a conventional loan, you should have a low debt-to-income ratio of, at most, 50% for rare exceptions, but financial institutions prefer a ratio below 36%.

• Proof of Income: You’ll need to prove that you’re employed and have received a salary for the past few months.

Down Payment

When you receive a home loan, you usually need to pay a down payment. This amount guarantees to the financial institution that you’re committed to the purchase of the house. When it comes to jumbo loans, down payments used to be 30%. However, it’s now in the 15% – 20% range. Meanwhile, conventional loans have a lower down payment range of only 10% – 15% and 3% – 5% if they’re a conforming loan. Plus, since jumbo loans are larger than conventional loans, the down payment amount is much larger, too.

Closing Costs

Comparing jumbo vs conventional loan also reveals a difference in closing costs. This cost is between 2% – 5% of the loan for both types of mortgages. Therefore, jumbo loans have higher closing costs than conventional ones since their loans are bigger in terms of amount.

Interest Rates

Interest rates used to be lower for conventional loans than for jumbo loans, meaning that it costs less overall to get a conventional loan. However, there are currently jumbo loans that can have lower interest rates than the highest conventional loans interest rate. Therefore, the conventional interest rate depends on the financial institutions giving out conventional loans. On the side of jumbo loans, the interest rate depends on the Federal Reserve and your financial portfolio.

Property Size

The property size is also different when you compare jumbo loans vs conventional mortgages. A conventional conforming loan has to abide by the Federal Housing Finance Agency regulations. These regulations include a maximum size for a property. On the other hand, you can use a jumbo loan to buy a property as big as the financial institution giving out the mortgage is willing to accept.

Backing

Loans require backing to ensure that if you default, there’s a way for the financial institution to recover the amount you’ve yet to repay. With a conventional conforming loan, the backing can come from government-sponsored enterprises like Fannie Mae or Freddie Mac.

Meanwhile, jumbo loans are always non-conforming. Hence, the financial institution that gives out a jumbo loan underwrites it. This increased risk is part of the reason why they have stricter requirements and a higher down payment.

Conclusion

As we compared jumbo vs conventional loans, we discovered that they have striking differences even if they’re both given out by private financial institutions. All of these differences stem from the fact that they serve a different purpose. Jumbo loans aid you in the purchase of expensive homes, so you need to prove that you have a high income and little debt to ensure that you’ll repay it.

On the other hand, conventional loans can be conforming loans that have a smaller down payment, closing cost, and, at times, even interest rates. However, since the government backs those loans, there’s a limit to the size of the property you can purchase with this loan. So, if you’re looking for a private loan to purchase a home, keep all these differences in mind.