Jumbo vs. Conventional Mortgages: How Do They Differ?

Jumbo vs. Conventional Mortgages: An Overview

Jumbo mortgages and conventional mortgages are two types of financing borrowers use to purchase homes. Both loans require homeowners to meet certain eligibility requirements including minimum credit scores, income thresholds, repayment ability, and down payments. Both are also mortgages issued and underwritten by lenders in the private sector, as opposed to government agencies like the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), or the USDA Rural Housing Service (RHS).

Though they may serve the same purpose—to secure a property—these two mortgage products have several key differences. Jumbo mortgages are used to purchase properties with steep price tags—often those that run into the millions of dollars. Conventional mortgages, on the other hand, are smaller and more in line with the needs of the average homebuyer. They also may be purchased by a government-sponsored enterprise (GSE) such as Fannie Mae or Freddie Mac.

Jumbo Mortgages

Jumbo mortgages are loans intended for financing high-priced properties, as their name implies. Basically, they involve big sums: around $650,000 at least and often running into the millions. Luxury homes and those found in highly competitive local real estate markets are generally financed via jumbo mortgages.

Largely because of their size, jumbo mortgages or loans are nonconforming. That means they fall outside of Federal Housing Finance Agency (FHFA) restrictions on loan sizes and values and are, therefore, restricted from receiving backing from Fannie Mae or Freddie Mac. They also exceed the maximum conforming loan limit in their respective counties.

Other factors that disqualify jumbos from being conforming loans may include well-off borrowers with unique needs or interest-only mortgages that culminate in balloon payments, wherein the entire borrowed balance is due at the end of the loan term. Despite this, many jumbo loans still adhere to the guidelines for qualified mortgages (like not allowing excess fees or loan terms or negative amortization) set by the Consumer Financial Protection Bureau (CFPB).

In order to qualify for a jumbo loan, borrowers must have an excellent credit score. Borrowers should also be in a higher income bracket. After all, it takes a lot of money to keep up with the regular mortgage payments and other related costs. And because lending requirements have become stricter following the financial crisis, borrowers are required to have low debt-to-income (DTI) ratios.

Jumbo Loan Requirements

Because jumbo loans aren’t backed by federal agencies, lenders are taking on more risk when they offer them. You’ll face more stringent credit requirements if you’re trying to secure one. You’ll also need to meet some minimum requirements in order to qualify, including:

• Proof of income: Come prepared with two years’ worth of tax documentation or similar paperwork to prove that you have a reliable, consistent source of income. Lenders will also want to see you have enough liquid assets on hand to cover six months’ worth of mortgage payments or more.
• Credit score and history: The higher, the better. There’s a very low probability that lenders will approve you for a jumbo mortgage if your credit score falls far below 700.
• DTI ratio: Your debt-to-income ratio (your monthly debt obligations compared to your monthly income) should be no more than 43% to 45% to qualify for a conventional mortgage. Lenders will typically look for an even lower DTI for jumbo mortgages—at the most 43% and ideally 36% or even less—because the loans are so large.
• Loan to value – LTV for jumbo loans may be stricter than with a conventional mortgage, often requiring an LTV of 80% or lower. This means that the loan can finance no more than 80% of the purchase price of the property.
• Down payment -because of the LTV requirements, you will likely need to come up with at least 20% up front as a down payment.

Conventional Mortgages

Technically, a conventional mortgage is any mortgage not backed by the federal government. So anything that’s not an FHA loan, VA loan, or a USDA loan but offered and issued by private lenders such as banks, credit unions, and mortgage companies can be considered a conventional loan or mortgage.

Unlike jumbo loans, conventional mortgages may be either conforming or nonconforming. Conforming loans are those whose size limits are set by the FHFA and whose underwriting guidelines are set by Fannie Mae and Freddie Mac. These guidelines factor in a borrower’s credit score and history, DTI, the mortgage’s loan-to-value (LTV) ratio, and one other key factor—the size of the loan.

Conforming loan limits are adjusted annually to keep pace with the average U.S. home price so when prices increase, loan limits increase by the same percentage as well. For 2022, the national maximum for conforming conventional loans is $647,200 for a single-unit dwelling, up from up from $548,250 in 2021.

Fannie Mae and Freddie Mac will purchase, package, and resell virtually any mortgage as long as it adheres to their conforming loan guidelines and the FHFA’s size limits. Why is this significant? Because these two government-sponsored agencies are the major market makers for mortgages, and the ability to sell a loan to them—as most lenders eventually do—makes that mortgage far less risky from the lender’s viewpoint. So they are more likely to approve an application for it and offer better terms.

Just like jumbo loans, conventional loans require a down payment, a minimum credit score, and a certain income level, as well as a low DTI ratio. You’ll generally need a credit score of at least 620 (considered “fair”) before a lender will approve you for a conventional mortgage.

Not all conventional mortgages conform to these guidelines, however, and those that don’t are considered nonconforming loans. These tend to be more difficult to qualify for than conforming mortgages because they’re not backed by the government, or marketable to Fannie and Freddie, so eligibility and terms are left to the lenders.

Jumbo vs. Conventional Loans: A Comparison

In the past, interest rates for jumbo loans were much higher than those for traditional, conventional mortgages. They still tend to be slightly higher, although the gap has been closing. You may even find some jumbo rates that are lower than conventional rates. A mortgage calculator can show you the impact of different rates on your monthly payment.

Jumbos can cost more in other ways, though. Down payment requirements are more stringent, at one point reaching as high as 30% of the home purchase price; though it is more common now to see jumbo loans requiring a down payment of 15% to 20%, higher than the 10% to 15% that some conventional loans require (and of course far higher than the 3.5% that FHA and other federal loans allow). The higher interest rates and down payments are generally put in place primarily to offset the higher degree of risk involved with jumbos because they are not guaranteed by Fannie Mae or Freddie Mac.

Jumbo mortgages often have higher closing costs than normal mortgages because they are large loans.

Lenders expect more of jumbo borrowers, too. Their credit scores need to be higher (preferably above 700), their DTIs lower, and their bank account balances must cover 12 months’ worth of homeownership expenses—just about double the requirement for conventional mortgage borrowers. In other words, jumbo mortgagors are expected to be people with few debts and lots of liquid assets.

Here’s a comparison of typical terms for jumbo and conventional mortgages.

The Bottom Line

A jumbo mortgage is a large-sized loan, issued by private financial institutions, that’s earmarked for highly-priced properties—at around $650,000 or more. A conventional loan is a more general, umbrella term for any privately issued—as opposed to federally subsidized—mortgage.

Many conventional loans are conforming: They’re within a size threshold set annually by the FHFA and can be sold to mortgage market makers Fannie Mae and Freddie Mac. Other conventional loans are not and are deemed nonconforming.

But the bottom line is that typically conventional loans are smaller than jumbos and have less stringent requirements and standards.