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What’s the Difference Between a Jumbo Loan and a Conventional Loan?

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October 29, 2020

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No matter what you’re shopping for, it’s always important to compare your options. That’s true whether you’re buying a new sweater or investing in your mortgage. 

Very few things in this world are one-size-fits-all, and mortgages are no different! Jumbo loans and conventional loans are two types of mortgages that each help you get a home, but have different requirements and long-term prospects. 

Wondering what’s the difference between a jumbo loan and a conventional loan? Want to know how they stack up against each other? Let’s discuss their similarities, differences, and other considerations when trying to choose the best option for you.

What Is a Jumbo Loan?

As you may have guessed from its name, a jumbo loan is a loan that’s sum is significantly larger than its conventional counterpart. According to the Federal Housing Finance Agency (FHFA), you may need a jumbo loan if your borrowing need exceeds the local conventional loan limit.

This limit differs between counties. For most, it’s an average of $510,400. Anything above that figure puts you in jumbo loan territory. The criteria for acceptance when applying for a jumbo loan is stricter than conventional requirements.

Your credit score, debt-to-income ratio (also known as your DTI), your cash reserves, and more may need to be assessed by a lender before providing a jumbo loan. This is because of the heightened risk involved: lenders tend to be wary when doling out larger loan amounts.

Jumbo loans also often feature higher completion/closing costs. That’s because of high property values, which can involve more steps in administrative and legal processes. If you are opting for a jumbo loan, you should prepare for higher fees at closing. 

What Is a Conventional Loan?

Conventional loans are the most common form of mortgages available. They’re usually offered by private lenders, such as banks or credit unions, and are not insured by the federal government. Conventional loans are also known as “conforming” loans (as opposed to jumbo loans, which are known as “non-conforming”).

Conventional loan limits are decided by looking at the total sum of the loan and how it corresponds with the FHFA guidelines. As mentioned above, the maximum amount for a conforming loan rests at $510,400. In more expensive areas, such as Washington DC or New York, this can rise to $765,600. 

The lack of government insurance may put you off conventional loans, but they can be the right choice for those with a high credit score and enough savings to afford a high down payment.

The benefits of conventional loans reside in their flexibility. A down payment of 20% may sound terrifying or downright impossible. Luckily, some conventional mortgage loans only require a down payment of as little as 3%. However, these agreements are unique and often require the borrower to take out private mortgage insurance.

Generally speaking, conventional loans run for 30 years. However, there are variations within that range. Some run for 15 or 20, depending on the repayment plan agreed upon when first signing. These guidelines either fall under FHFA regulations if the loan is conforming or will be agreed upon by the lender if non-conforming. 

Similarities Between Jumbo and Conventional Loans

Both types of mortgages are offered by private financial institutions. Neither conventional nor jumbo loans are insured by the government, which separates them from the Federal Housing Administration (FHA) or Veterans Affairs (VA) loans your bank may offer. 

They also both have particular financial qualifying requirements. These typically include:

  • Your credit score
  • Repayment ability
  • Income thresholds
  • Down payment percentages
  • Documentation relating to your financial standing
  • Debt-to-income (DTI) ratio

While each loan type considers the above factors, they each place different values and limits on each criterion.

Differences Between Jumbo and Conventional Loans

Most notably, jumbo loans and conventional loans differ in the monetary amount they offer. Jumbo loans offer much more than conventional loans. They are often used to purchase properties that exceed millions of dollars, meaning they’re more suited to luxury estates or highly competitive real estate markets. 

Jumbo loans, due to their exorbitantly high prices, are always non-conforming to FHFA loan restrictions. This means that the lender and the borrower decide the terms of the loan agreement together. However, that doesn’t mean you’re out on your own. Many jumbo loans still adhere to the guidelines set out by the Consumer Financial Protection Bureau.

Beyond the value, the key differences between jumbo and conventional are the eligibility criteria. Jumbo loans generally ask more of you and are more difficult to acquire. This is because of the heightened value of the loan and the greater risk posed to the lender. For instance, your credit score for a jumbo loan should be at least 670. For a conventional loan, it should be at least 580. 

These credit scores are the minimum. To qualify for qualification, you need to aim for a credit score of 640 for conventional and exceeding 700 for jumbo. If you have a bad credit score, you may need to learn how to borrow with poor credit. 

Jumbo loans also generally require a far higher down payment than conventional loans. They also feature higher interest rates and greater monthly repayments. With this in mind, jumbo loans are reserved for those with a much bigger budget. 

Final Thoughts

There’s no one type of mortgage that’s inherently better than another. They all depend on your individual circumstances and financial situation.

First-time buyers may want to stick with a conventional loan. However, if you’re looking to purchase a luxury property or move into a competitive market, then a jumbo loan might be the better option. Consider your own finances and your loan eligibility to decide which option to pursue.

At Associates Home Loan, we’re proud to offer jumbo loans to qualified applicants. Contact us at Associates Home Loans today to learn more about what we can do for or if you have more questions about choosing a mortgage. 

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