Jumbo vs. Conventional Mortgages: An Overview

Jumbo and conventional mortgages are two types of financing used by borrowers to purchase homes. Both require homeowners to meet certain eligibility requirements including minimum credit scores, income thresholds, repayment ability, as well as minimum down payment requirements. Government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac, the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), or the USDA Rural Housing Service do not back either mortgage product. While they may be used for the same purpose—to secure a property—they are inherently different.

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 more in line with the needs of the average homebuyer and can be conforming or nonconforming. Keep reading to find out more about these two kinds of mortgage products.

Key Takeaways

  • Jumbo and conventional mortgages are two products borrowers use to secure properties.
  • Conventional mortgages can either conform to government guidelines or they can be non-conforming.
  • Jumbo mortgages tend to fall outside conforming loan restrictions, typically because they exceed the maximum amount backed by government-sponsored enterprises like Fannie Mae or Freddie Mac.

Jumbo Mortgages

As noted above, jumbo mortgages are loans used to finance property purchases. Unlike regular mortgages, these loans are meant for high-priced properties. Luxury homes and those found in highly competitive local real estate markets are generally financed using jumbo mortgages.

These mortgages—also called jumbo loans—are nonconforming. This means they fall outside of Federal Housing Finance Agency (FHFA) loan restrictions and are, therefore, not backed by Fannie Mae or Freddie Mac. Despite this, many still adhere to the guidelines for qualified mortgages as set by the Consumer Financial Protection Bureau (CFPB). They also exceed the maximum conforming loan limit in their respective counties. Other factors that disqualify them from being conforming loans may include well-off borrowers with unique needs or interest-only mortgages that culminate in balloon payments, where the entire borrowed balance is due at the end of the loan term.

In order to qualify for a jumbo loan, borrowers need to 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 since lending requirements have become stricter following the financial crisis, borrowers are required to have low debt-to-income (DTI) ratios.

In the past, interest rates for jumbo loans were much higher than traditional mortgage rates. Although the gap has been closing, they are still slightly higher. Down payment requirements were also similarly structured—at one point reaching as high as 30%. But it is more common now to see jumbo loans requiring a down payment of about 10% to 15%. The higher interest rates and down payments of the past were generally put in place primarily to offset the higher degree of risk involved with these mortgage products since they are not guaranteed by the GSEs noted above.

Conventional Mortgages

Conventional mortgages are loans offered by private lenders such as banks and other financial institutions such as credit unions and mortgage companies. Just like jumbo loans, borrowers require a down payment, a minimum credit score, a certain income level, as well as a low DTI ratio, and are not backed by GSEs either.

Unlike jumbo loans, conventional mortgages may be either conforming or non-conforming. Conforming loans are those whose limits are set by the FHFA. The underwriting guidelines for these loans are also set by Fannie Mae and Freddie Mac. For 2021, the national maximum for conforming conventional loans is $548,250 for a single-unit dwelling, up from $510,400 in 2020. More than 200 counties around the U.S. are designated as high-cost, competitive areas, however, and maximum loan limits in these areas can go up to $822,375 in 2021, up from $765,600 in 2020. New York City, Los Angeles, and Nantucket are a few such locations.

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.

Not all mortgages conform to these guidelines, however, and those that don't are considered conventional non-conforming loans. These tend to be more difficult to qualify for than conforming mortgages because they're not backed by the government, so eligibility and terms are left to the lenders. One upside is that they often cost less.

Special Considerations

Fannie Mae and Freddie Mac will purchase, package, and resell virtually any mortgage as long as it adheres to their conforming loan guidelines. These guidelines factor in a borrower’s credit score and history, debt-to-income (DTI) ratio, the mortgage’s loan-to-value (LTV) ratio, and one other key factor—the size of the loan. These maximum figures are set by the government.

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. As mentioned above, you'll 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: You'll generally need a credit score of at least 580 (considered “fair”) before a lender will approve you for a conventional mortgage, but there’s a very low probability that lenders will approve you for a jumbo mortgage if your credit score falls below 670.
  • Debt-to-Income ratio (DTI): Your debt-to-income ratio (your monthly debt obligations compared to your monthly income) should be 43 percent or less to qualify for a conventional mortgage. Lenders will typically look for an even lower DTI for jumbo mortgages since the loans are so large.