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 loans are mortgages that exceed the conforming loan limits.
- Jumbo and conventional mortgages are two types of private loans borrowers use to secure properties.
- A conventional mortgage usually falls within a certain size, as set by the FHFA annually, and adheres to certain government guidelines.
- A jumbo mortgage is in excess of FHFA standards, typically starting around $650,000, and cannot be backed by government-sponsored enterprises like Fannie Mae or Freddie Mac.
- Jumbo mortgages tend to have more stringent requirements for borrowers than conventional loans do.
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.
The 2022 maximum conforming loan limit for a single-family home in most of the United States. Jumbo mortgages typically involve any amount higher than this limit.
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.
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.
Each year, between 100 and 200 counties around the U.S. are designated as high-cost, competitive areas. Maximum loan limits in these areas can go up to $970,800 in 2022, up from $822,375 in 2021. New York City, Los Angeles, and Nantucket are a few such locations. So mortgages in these real estate markets would be considered "jumbo" if they were to exceed these amounts.
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.
Upfront fees on Fannie Mae and Freddie Mac home loans changed in May 2023. Fees were increased for homebuyers with higher credit scores, such as 740 or higher, while they were decreased for homebuyers with lower credit scores, such as those below 640. Another change: Your down payment will influence what your fee is. The higher your down payment, the lower your fees, though it will still depend on your credit score. Fannie Mae provides the Loan-Level Price Adjustments on its website.
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.
If you want to get technical, a jumbo loan is, in lender-speak, a conventional, nonconforming loan.
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.
|Conventional vs. Jumbo Mortgages Comparison|
|Conventional Loan||Jumbo Loan|
|Maximum Loan Amount||$647,200-$970,800*||$647,200 and up*|
|Typical Down Payment||3%-20%||10%-20%|
|Minimum Credit Score||620||700|
|Debt to Income Ratio||43%-45%||36%-43%|
|Cash Reserves Needed||0-6 months’ homeownership expenses||Up to 12 months’ homeownership expenses|
|Maximum Loan-to-Value Ratio||97%||90% or less|
|Backed by FNMA/FRMC?||Yes||No|
|*based on 2022 FHFA figures|
Frequently Asked Questions
How Are Jumbo Mortgage Rates Set?
Like conventional mortgages, rates are influenced based on Federal Reserve benchmarks and on individual factors such as the borrower’s credit score. Jumbo mortgage rates will rise and fall in line with the Fed's short-term interest rates.
Additionally, because these loans cost more than half a million dollars and pose a great risk to lenders, borrowers will face more rigorous credit requirements. This includes having a much higher credit score (often at least 700) and a lower debt-to-income ratio. Lenders will also want borrowers to prove they have a certain amount of cash in reserve. The better your credit profile, the lower your jumbo mortgage rate will be.
Are Jumbo Loan Rates Higher than a Conventional Mortgage?
Jumbo loans, even though they are larger in size, often have lower interest rates today than conventional mortgages.
Which Should I Choose: A Jumbo or Conventional Loan?
A jumbo loan will automatically be applied if your mortgage is larger than $647,200. If you are buying a pricier home that exceeds the conventional loan limits, you will have to choose a jumbo loan, unless you can come up with a down payment large enough to get the loan's value under that limit.
What Are Mortgage Points?
Mortgage points, also known as discount points, are a fee borrowers pay lenders in order to receive a lower interest rate. In other words, you are prepaying interest for a period of time in order to pay less on the overall lifetime costs of your loan.
One mortgage point costs 1% of your loan amount. For instance, if you take out a loan for $500,000, you’ll pay $5,000 to reduce your rate by 0.25%. It may not seem like a huge amount, but it can add up to tens of thousands of dollars in interest over the life of the loan.
How Big a Mortgage Can I Afford?
How much you can borrow will depend on factors such as your credit score, income, assets, and the value of the property. Jumbo mortgages are generally the best for someone who is a high-income earner—essentially, someone who can afford the higher payments.
Even if lenders offer a specific loan amount, it doesn’t mean you need to purchase a home up to that limit. Carefully consider how much you want to pay and can easily afford so that you can achieve your other financial goals, like saving for retirement.
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.
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Federal Housing Finance Agency. "Conforming Loan Limits."
Consumer Financial Protection Bureau. "What Is a Jumbo Loan?"
Consumer Financial Protection Bureau. "CFPB Examination Procedures: Mortgage Origination," Pages 2-3.
Consumer Financial Protection Bureau. “What Is a Qualified Mortgage?”
Consumer Financial Protection Bureau. “What Is a Debt-to-Income Ratio? Why Is the 43% Debt-to-Income Ratio Important?”
Consumer Financial Protection Bureau. "Debt-to-Income Calculator," Page 2.
Consumer Financial Protection Bureau. "Conventional Loans."
Federal Deposit Insurance Corporation. “Home Possible,” Page 143-145.
Federal Housing Finance Agency. "FHFA Conforming Loan Limits FAQs," Page 4.
Federal Housing Finance Agency. "FHFA Announces Conforming Loan Limits for 2021."
Federal Housing Finance Agency. "Conforming Loan Limits Map."
Fannie Mae. “Loan-Level Price Adjustment Matrix.” Page 2.
myFICO. “What Is a Credit Score?”
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