Navigating your way through loan amounts, interest rates, terms, and lenders can be headache-inducing when you’re shopping for a loan, but one key decision you’ll need to consider is what type of mortgage to secure: a jumbo home loan or a conventional mortgage.
Though they do the same job – providing you with the financing you need to buy a property – conventional mortgages and jumbo loans have a key disparity: how much you can borrow and, in turn, how to qualify for a loan from the minimum credit score and down payment to income thresholds and debt-to-income ratios.
In a nutshell, jumbo loans are earmarked specifically for homebuyers who are buying high-priced properties. Think luxury properties, custom-made homes, or properties in some of the most expensive neighborhoods in the country. Jumbo loans provide more financing than the maximum amount homebuyers can borrow from a conventional loan.
So if you’re eyeing a luxury property or you’re buying a house in a high-cost area, you may be wondering if you’ll need a jumbo loan to make your purchase. Here’s our guide to jumbo loans and conventional mortgages, showing you the top differences between the two and how to decide which product to go with.
Jumbo Loans vs. Conventional Loans
Jumbo loans are non-conforming loans, which means they do not adhere to the “conforming” guidelines and standards set by Fannie Mae and Freddie Mac, alongside the annual regulations set out by the FHFA (Federal Housing Finance Agency). They’re purchased through private lenders, such as banks or mortgage brokers.
On the other hand, conventional loans are conforming loans. They meet the standards set by Fannie Mae and Freddie Mac – the largest purchasers of mortgage loans – along with FHFA regulations. Traditionally, Fannie Mae and Freddie Mac buy up these conventional loans provided by your everyday lenders, freeing up their cash so they can offer more financing to Americans.
Jumbo Loans vs. Conventional Loans: How Much Can I Borrow?
Each year, the FHFA announces the loan limits for conventional loans. As of 2023, the maximum loan limit for a conventional loan sits at $726,200, an increase of $79,000 from 2022’s $647,200, according to the FHFA.
However, the maximum loan amount increases if you’re an American buying a home in a “high-cost” area, where local county median home values exceed the baseline limit. If you’re buying a property in one of these high-cost regions, the cap increases to $1,089,300 – 150 percent of the initial maximum limit. You can find out if your property falls into one of these areas using this FHFA map.
Bear in mind, Alaska, Hawaii, Guam, and the U.S. Virgin Islands follow special statutory provisions – wherever you are in these regions outside of the continental U.S., homebuyers there can seek out conventional loans capping at $1,089,300, too.
If you’re buying a home in the mainland U.S. that requires a mortgage of more than $726,200, applying for a jumbo loan is your best course of action. Check first if the property is in a high-cost area where conventional loan limits may provide enough financing.
Los Angeles and Orange Counties in California are prime examples of areas where conventional loan limits increase to over $1 million.
Jumbo Loans vs. Conventional Loans: How to Qualify
Jumbo loans aren’t backed by the likes of Fannie Mae and Freddie Mac, so your lender is taking a bigger risk of lending you this hefty sum of money. This increased risk passes onto you, the applicant – you’ll need to meet more stringent requirements to qualify for a jumbo loan compared to a conventional one.
Here’s a closer look at each option’s qualifying criteria:
|Conventional Loans||Jumbo Loans|
|Maximum loan amount||$726,200 (up to $1,089,300 in high-cost areas)||$726,200 and up|
|Backed by FNMA/FRMA||Yes||No|
|Typical down payment required||3% to 20%||10% to 25%|
|Private mortgage insurance required||Yes, if the down payment is below 20%||Yes, if the down payment is below 20%|
|Minimum credit score||620||700|
|Debt-to-income ratio||36% to 43%||36%|
|Savings||0 to 6 months||6 to 12 months|
Here’s the thing: While there are no universal baseline eligibility requirements for jumbo loans, expect a harder time qualifying for one compared to a conventional loan. You’re asking your lender for a larger-than-normal mortgage after all.
Eligibility requirements will differ from lender to lender but you should expect these key differences between both loan products:
- Down payment: Homebuyers can secure a conventional mortgage by applying a down payment of as little as three percent, but that won’t fly with a jumbo loan. Your lender will ask for as little as 10 percent down, but you should aim for a down payment of as high as 25 percent for a jumbo loan, especially if you want to secure the lowest advertised interest rates. Whether you’re taking the conventional or jumbo loan route, your down payment is proof to lenders that you’re committed to this investment. Regardless of which route you take, try to get to as close to 20 percent as possible. Once you hit the 20 percent mark, you no longer need to pay for private mortgage insurance.
- Credit score: With a conventional loan, you can get away with a “fair” credit score of 620 but you’ll need a squeaky-clean credit score – and credit history – in the “excellent” threshold of about 700 to 740 to secure financing for a jumbo loan. Ideally, you’re paying your debts on time and in full for several months before you apply for jumbo loan financing. Your lender will want to see that you’re a responsible borrower.
- Debt-to-income ratio: Your debt-to-income ratio is the percentage of your gross monthly income that’s dedicated to paying off your existing debts. With a conventional mortgage, 43 percent is the sweet spot, but it should be much lower – at 36 percent or less – to qualify for a jumbo loan. Essentially, you’re showing lenders you have plenty more income available to put towards the supersized mortgage you’re asking for.
- Savings: Down payment and servicing debts aside, another hoop you’ll have to jump through for a jumbo loan is showing your lender you have liquid cash in savings should anything go awry. To qualify for a jumbo loan, you’ll need about six to 12 months of mortgage payments stashed away in the bank, with the minimum amount varying from lender to lender. This stipulation doesn’t apply to conventional loans but goes to show you the financial commitment involved in qualifying – and managing – a jumbo loan for the long haul. Simply put, to get approved for a jumbo loan, you ought to have few debts and lots of liquid assets.
- Proof of employment and income: Across both loan processes, your lender will underwrite your loan application, poring over your employment history, your salary, the stability of your income streams, your existing debts, and whether you’re in the right financial place to take on the debt you’re asking for. Safe to say, you must have a higher-than-average income for at least the last two years to get approved for a jumbo loan. It takes a lot more income to keep up with a gargantuan jumbo loan!
- Property appraisals: Hands down, the appraisal and closing costs processes are lengthier – and more costly – for jumbo loans. Conventional loans typically require a single appraisal so your lender can fairly determine the market value of the property, but this step may require two appraisals if you’re applying for a jumbo loan.
Jumbo Loans vs. Conventional Loans: Which Has Better Terms?
Differences in loan amounts and eligibility criteria aside, jumbo loans and conventional mortgages operate in a similar way. Even though jumbo loans are larger in size, they could have lower interest rates than conventional mortgages – this all depends largely on the applicant, their down payment, and their credit profile instead of the mortgage product.
You can apply for a jumbo loan or conventional loan with terms between five and 30 years, and both options come with fixed or variable interest rates.
Once you’ve completed the application process and closed on your new home, managing your mortgage payments, setting up a repayment schedule, and even refinancing your loan are generally the same between both options.
Jumbo Loans vs. Conventional Loans: Which is Best for You?
Ultimately, the choice between a jumbo and conventional loan is a personal one – hinged largely on how much you need to borrow to purchase your new home.
A jumbo loan application will automatically kick in if your mortgage is higher than $726,200 – – and up to $1,089,300 in high-cost areas. If you’re buying a multi-million-dollar mansion, for example, you’re easily wading into jumbo loan territory.
If you’re buying a pricier home that exceeds the FHFA guidelines for conventional loans, you’ll need the help of a jumbo loan unless you have a down payment large enough to secure a loan under the maximum limits.
The other part of the equation is determining how much house you can afford. Jumbo loans aren’t for everyone – and lenders will be quick to scrutinize your income, savings, credit score, assets, and debts before approving you for a larger mortgage.
Homebuyers must think critically. Whether you’re pre-approved for a conventional or jumbo loan, you do not have to purchase a home right up to that limit. Look at your budget, give yourself some wiggle room, and make sure you’re choosing a mortgage that’s manageable throughout the years.
Finally, consider your other options on the table as well. Next to conventional loans and jumbo loans are a suite of non-conforming loans you may be eligible for. These include government-backed loans such as FHA (Federal Housing Administration) loans, VA (Veterans Affairs) loans, and USDA (U.S. Department of Agriculture) loans.
They’re available to help qualifying Americans buy, build, improve a home, or refinance a current home loan. They’re also incredibly generous – some come with no down payment, no private mortgage insurance, and lower interest rates to help segments of the population with homeownership. You’ll need to meet specific criteria, such as being a military veteran or a low-income household to qualify, though.
Choosing which type of mortgage product to apply for comes down to the price tag of the home you’re buying, where it’s located in the country, and how much you can safely qualify for.
You may want a jumbo mortgage if you’re buying a luxury home or a property in an expensive part of the country, and you have the means to afford a hefty monthly mortgage payment. You should have an excellent credit score, a high income with savings to boot, and a good steer on managing your existing debts before putting your foot forward for a jumbo loan.
On the other hand, a conventional loan is the most traditional route to take. If you’re financing a home under the maximum FHFA loan limits and you have a decent credit rating and a moderate income, this type of mortgage is suitable and you won’t need a jumbo mortgage at all.
Carmen Chai is an award-winning Canadian journalist who has lived and reported from major cities such as Vancouver, Toronto, London and Paris. For NewHomeSource, Carmen covers a variety of topics, including insurance, mortgages, and more.