Jumbo vs Conventional Loans

If you want to buy a particularly expensive home, then a conventional loan may not be enough. That’s where jumbo loans come into play. They come with their own terms and qualifications, especially as they are considered riskier than conventional loans. 

Borrowers interested in purchasing expensive property must prove they can finance such large payments. As part of this, they must typically show they have large enough reserves to decrease their riskiness and prove their creditworthiness.

Depending on the value of the property you plan on buying, you can choose whether a conventional or a jumbo loan best applies. If you are unsure which one best fits your needs, here is a detailed jumbo vs conventional loan comparison to help make the best decision.

What Are Conventional Loans?

Conventional loans are mortgage loans that are not insured or guaranteed by the federal government. Instead, they meet the guidelines set by Fannie Mae and Freddie Mac, government-sponsored enterprises that buy and sell mortgage-backed securities.

Conventional loans are the most common type of mortgage and are ideal for borrowers with good credit and a stable income. They can be used to finance primary residences, second homes, or investment properties, and come in various terms, most commonly 15 or 30 years. You can choose whether you want fixed or adjustable interest rates and don’t even have to pay private mortgage insurance if you can supply a 20% down payment.

What are Jumbo Loans?

Jumbo loans are non-conforming loans that exceed the limits set by Fannie Mae and Freddie Mac.

These loans are designed for financing high-value properties or homes in expensive real estate markets where housing costs exceed the conforming loan limits. The current loan limit set by Fannie Mae and Freddie Mac is currently $766,550 for most of the United States. Jumbo loans are designed for properties that exceed this limit.

Because jumbo loans represent a higher risk for lenders due to their size, they have more strict qualification requirements and may offer slightly different terms compared to conventional loans.

Jumbo Loan vs Conventional Loan

How do jumbo loans differ from conventional ones?

Credit Score

Conventional loans typically require a minimum credit score of 620, although scores of 680 or higher are often preferred to ensure better terms. Borrowers with scores above 740 usually qualify for the best interest rates and terms that lower the monthly payments.

Jumbo loans have stricter credit requirements. Most lenders look for a minimum credit score of 700, with many preferring 720 or higher. Some premium jumbo loans may even require scores of 760 or above to qualify for the best rates. Because of the value of the loan, these requirements protect lenders from risky borrowers.

Home Value

Conventional loans are used for homes valued below the conforming loan limits set by Fannie Mae and Freddie Mac. In most areas of the U.S., this limit is $$766,550  for 2024, although it can be higher in certain high-cost areas.

Jumbo loans are designed for higher-value properties that exceed the conforming loan limits. These loans can be used to finance luxury homes, properties in expensive real estate markets, or large estates that require financing above the conventional loan limits.

Debt-to-Income Ratio (DTI)

For conventional loans, lenders prefer a DTI of 43% or lower, though some may accept up to 50% in certain cases if the borrower can prove high income or cash reserves. This ratio includes all monthly debt payments divided by gross monthly income.

Jumbo loans have stricter DTI requirements. Many lenders cap the DTI at 43%, with some even preferring 38% or lower. This stricter requirement is there to ensure that high-income borrowers taking on large loans can comfortably manage their monthly payments.

Interest Rates

Conventional loans offer competitive interest rates, especially for borrowers with excellent credit and who put a large down payment. Rates are influenced by market conditions, the borrower’s creditworthiness, and the loan terms.

Historically, jumbo loans had higher interest rates than conventional loans due to the increased risk associated with larger loan amounts. However, in recent years, this gap has narrowed. Nowadays, jumbo loan rates may be comparable to or even lower than conventional loan rates, especially for highly qualified borrowers. In some cases, you may compare 30-year jumbo vs 30-year fixed conventional loans and realize that jumbo loan rates actually offer better terms — depending, of course, on the borrower’s qualifications.

Down Payment

For first-time homebuyers, down payment requirements for conventional loans can be as low as 3%, although 5% to 20% is more common. Putting down less than 20% requires private mortgage insurance (PMI).

Jumbo loans require larger down payments due to the higher loan amounts. Most lenders ask for at least 10% down, with many preferring 20% or more. Some jumbo loan programs may require down payments of 30% or even 40% for very high loan amounts or for borrowers with lower credit scores.

Reserves

Conventional loans may ask of borrowers to have reserves equal to 2-6 months of mortgage payments, including principal, interest, taxes, and insurance (PITI). This requirement can vary based on the borrower’s overall financial profile. The existence of substantial reserves can help borrowers land better loan terms.

Jumbo loans have more stringent reserve requirements. Many lenders require 6-12 months of PITI in reserves, with some high-end jumbo loans requiring up to 24 months. These substantial reserves help assure lenders that borrowers can handle the larger loan payments even in case of temporary financial setbacks.

Loan-to-Value Ratio (LTV)

Conventional loans can have LTV ratios up to 97% for first-time homebuyers, though 80-95% is more common. An LTV above 80% usually requires PMI.

Jumbo loans generally have lower maximum LTV ratios due to the larger loan amounts. Most jumbo lenders cap the LTV at 80-90%, with some programs requiring even lower LTVs for very high loan amounts or in certain high-risk scenarios. This lower LTV helps mitigate the lender’s risk on these large loans.

Choosing Between Conventional and Jumbo Loans

For most people who want to buy a home, the home value limit set for conventional loans is usually adequate. If, however, you want to buy a high-value property that exceeds this limit, you have to look for a jumbo loan. 

Conventional loans are flexible and accessible to a wide range of borrowers, making them suitable for many home purchases. They’re particularly fitting for people buying moderately priced homes or those with good, but not exceptional, credit and financial profiles.

Jumbo loans are geared to a more specific segment of borrowers — those looking to finance high-value properties. While jumbo loans come with stricter requirements across various criteria, they provide a useful financing option for luxury homes or properties in expensive markets that would otherwise be out of reach with conventional financing.

Ultimately, prospective homebuyers should consider their financial situation, long-term goals, and the properties they’re interested in. These factors will determine which type of loan best fits them.

Consult A Mortgage Loan Officer

If you are undecided, our qualified mortgage professionals at Society Mortgage will be happy to help you and explain the conventional vs jumbo loan differences. Once you know how you want to move forward, Society Mortgage is a professional mortgage lender you can trust. Our mortgage loan officers will be with you all the way through your jumbo loan vs conforming loan mortgage application process. Call us today and get started on your home-owning journey!

Frequently Asked Questions

Are jumbo loan rates higher than those of conventional loans?

Historically, jumbo loans had higher interest rates than conventional loans because of the higher risk related to larger loan amounts. However, in recent years, this gap has narrowed, and jumbo loan rates can be comparable to or even lower than conventional loan rates, especially for highly qualified borrowers.

Is a Jumbo loan better than a conventional loan?

The choice is exclusively upon the borrower’s needs. Jumbo loans are ideal for homebuyers who want to invest in expensive properties. However they come with higher interest rates due to increased lender risk. Conventional loans are generally more affordable for properties within the conforming loan limits.