Jumbo Vs. Conventional Loans: What’s The Difference?

An important part of buying a house is choosing the best financing option. The type of mortgage loan you go with will largely depend on the home’s price, the home’s location, your financial situation and the market.

Two popular choices among home buyers are conventional loans and jumbo loans. While jumbo loans are technically a subcategory of conventional loans – a blanket term for loans that aren’t backed by the federal government – jumbo loans do differ from most conventional loans. Jumbo loans exceed conforming loan limits, which makes them a good option for buyers who want to purchase a luxury home.

Let’s break down the key differences between jumbo and conforming conventional loans so you can decide which is more suitable for your situation and needs.

What’s The Difference Between A Jumbo Loan And A Conventional Loan?

The main contrast between jumbo and conforming conventional mortgages is their respective loan amounts.

Conventional loans are available through banks, credit unions and other financial institutions. They’re originated and serviced by priv’ate lenders and aren’t insured by a government agency.

Conventional loans are usually conforming loans. Conforming loans are home loans that meet the funding requirements of Fannie Mae and Freddie Mac, including the conforming loan limits set by the Federal Housing Finance Agency (FHFA). But conventional mortgages are also available as non-conforming loans, usually jumbo loans.

The key difference between a conforming conventional loan and a jumbo loan is that a jumbo loan is used for properties that exceed conforming loan limits.

Conforming Conventional Loan Vs. Jumbo Loan Requirements

The mortgage process for jumbo and conforming conventional loans is similar, but some requirements differ.

Because jumbo loans are for much higher loan amounts, they are riskier for lenders. You’ll typically face stricter lending requirements for a jumbo loan than a conforming conventional loan.

Borrower requirements can vary based on your lender, location and financial situation. Let’s look at a quick overview of each loan’s requirements before we take a deeper dive.

Qualifying For A Conforming Conventional Loan

The general minimum requirements for a conforming conventional loan include:

• A credit score of at least 620
• A debt-to-income ratio (DTI) of 43% – 50% or lower
• A loan-to-value (LTV) ratio of no more than 97%
• A minimum down payment of 3%

Your desired loan amount will also factor into your loan approval. For 2023, loan limits range from $726,200 to $1,089,300 for a 1-unit home, depending on where you’re buying. You can use a conforming conventional loan to purchase primary residences, second homes and investment properties. If your down payment is less than 20%, you may be required to pay private mortgage insurance (PMI).

Qualifying For A Jumbo Loan

Jumbo loans have stricter requirements for borrowers to meet because they are more expensive.

Jumbo loans typically require:

• A credit score of at least 680
• A DTI ratio no higher than 45%
• A down payment of 10.01% – 25%
• Up to 18 months of cash reserves

Jumbo mortgages are non-conforming loans with no specific loan limits. You can borrow up to several million dollars with a jumbo loan. The LTV ratio on a non-conforming loan should be less than or equal to 89.99%.

Jumbo Loan Vs. Conforming Conventional Loan Rates

Since jumbo loan amounts are higher than conforming conventional loan amounts, you might assume that jumbo loan interest rates would be higher – but that’s not always the case. Market trends largely determine mortgage rates and, of course, your credit score and down payment. Jumbo loan rates are competitive, so you may get a lower rate than you would with a conforming conventional loan.

When To Choose A Jumbo Mortgage Or Conforming Conventional Loan

Different types of home loans are available for different scenarios, so make sure you’re getting the right mortgage for your situation.

Consider a jumbo mortgage in the following cases:

• You want to finance a large, luxury property.
• You want to finance a home in a high-cost or hyper-competitive area.
• You have a high credit score and income.
• You want to buy a high-cost vacation home.

You may want to consider a conventional loan in these scenarios:

• You need a loan below conforming loan limits.
• You have “good” or “very good” credit.
• Your income is good, but it’s not enough for a jumbo loan.

You can also ask your mortgage lender about other financing options. You may not be limited to conventional mortgages. For instance, the Federal Housing Administration offers FHA loans and FHA jumbo loans to qualifying borrowers.

Jumbo Vs. Conforming Conventional Loans: Pros And Cons

Just because you’ve chosen the right home loan for you doesn’t mean the loan won’t have any downsides. Jumbo and conforming conventional loans have their pros and cons.

Jumbo Loan Pros

Consider the benefits you can enjoy with a jumbo loan, including:

• Borrowing more money from your lender
• Qualifying for a competitive interest rate
• Affording a more expensive home or a home in a high-cost area

Jumbo Loan Cons

Consider the drawbacks you may face with a jumbo loan:

• Needing a higher credit score and income to qualify
• Making a bigger down payment
• Saving more in cash reserves
• Making a larger monthly mortgage payment

Conforming Conventional Loan Pros

Consider these pros of conforming conventional loans:

• Meeting lower credit score requirements
• Financing with a 3% down payment
• Making a lower monthly mortgage payment

Conforming Conventional Loan Cons

Consider these cons of conforming conventional loans:

• Staying within conforming loan limits
• Purchasing PMI if your down payment is less than 20%
• Getting a higher interest rate – especially if you have a low credit score

FAQs About Jumbo and Conforming Conventional Loans

Are you still having a hard time choosing the loan that best fits your needs? Learn more about each option by reading through these frequently asked questions.

Are jumbo rates typically higher than conforming conventional rates?

The interest rates on jumbo loans can be higher than interest rates on conforming conventional loans because jumbo loans are expensive and considered riskier investments for lenders. But jumbo rates tend to be competitive with market rates and are affected by a borrower’s creditworthiness. You may see a range of mortgage rates while you research.

What is the limit on a conforming conventional mortgage?

The 2023 conforming loan limit for a conventional loan is $726,200, and it hits a ceiling of $1,089,300 in high-cost areas. The FHFA assigns conforming loan limits by county, with the baseline loan limit assigned to around 95% of counties. However, the limit is higher for properties with 2 – 4 units.

Do jumbo loans have PMI?

It depends on the lender. However, because jumbo loans require a higher down payment, many jumbo loans don’t require PMI

What credit score do I need for a conforming conventional mortgage?

To qualify for a favorable interest rate on a conforming conventional loan, the minimum credit score requirement is generally 620. Jumbo loans usually have higher credit score requirements, typically around 680.

The Bottom Line

If you need a bigger mortgage than conforming limits allow, consider applying for a jumbo loan. If you can meet the lending criteria for jumbo loans, you could soon be the owner of a big, luxurious mansion or vacation home.

But dream homes come in all sizes and prices. You may be able to afford a great home with a conforming conventional mortgage. The choice comes down to the kind of home you want and what your financial situation will allow.

Want a better look at your home loan options? Start the mortgage approval process today!