Browsing financing products can feel like browsing homes in a never-ending housing development. While having plenty of options is good, the more you have to choose from, the harder it becomes to make a choice. When considering financing options, jumbo and conventional mortgages are the most popular. But many people ask the same question: What is the difference between jumbo loans and conventional loans?
Luckily, we’re here to help. At mbanc, we have helped people purchase their dream homes with a range of financial products for years, from interest-only jumbo loans to conventional mortgages. Learn the difference between jumbo loans and conventional loans in our blog.
What is the Difference Between Jumbo Loans and Conventional Loans?
When choosing between financing products to purchase a home, several options are available. Two of the most common are jumbo loan mortgages and conventional loans. To learn the difference between them, read our blog.
What is a Jumbo Loan?
Let’s start with jumbo mortgages to answer the question, What is the difference between jumbo loans and conventional loans? Jumbo loans are financing for high-priced homes.
Generally, properties must cost at least $650,000, though these loans are typically used for properties that cost millions. People interested in purchasing luxury properties or those in highly competitive markets with these loans.
These loans exceed the maximum conforming loan limit, are considered ‘nonconforming,’ and fall outside the Federal Housing Finance Agency (FHFA) regulations on loan sizes and values. They cannot get back from Fannie Mae or Freddie Mac.
Features that disqualify jumbo loans from constituting conforming loans include wealthy borrowers with unique needs and situations and interest-only loans that culminate in balloon payments (the entire borrowed amount is due at the end of the loan term.)
Jumbo loans aren’t backed by federal agencies, so lenders incur more risk when they offer them to borrowers. Requirements to qualify for jumbo loans include:
- Proof of income (pay stubs, tax returns, bank statements, W-2 forms, 1099s)
- An exceptional credit score and history
- A DTI ratio of no more than 43%-45%
- At least a 20% downpayment
“In the past, interest rates for jumbo loans were much higher than conventional mortgages. While they still are slightly higher, the gap in recent years has been closing, with some jumbo mortgage rates being more competitive than conventional rates these days. For borrowers, this presents a great opportunity to purchase a luxury investment property and realize greater profits, though they often have higher closing costs.” – Frank Avalos, Executive Manager MBANC
What is a Conventional Loan?
Defining conventional loans is the next step in answering the question, What is the difference between jumbo loans and conventional loans?
Unlike jumbo mortgages, conventional mortgages can be either conforming or non-conforming. Conforming loans have limits set by the underwriting guidelines set by Fannie Mae and Freddie Mac.
These guidelines take your credit score, DTI, the loan-to-value (LTV) ratio, and the size of the loan into consideration. With conforming loans, you can expect minimal cash reserve requirements, lower down payments, and lower closing costs.
Still, not all conventional mortgages conform to these guidelines. Loans that don’t conform are known as ‘non-conforming’ loans. You’ll typically need to make a certain level of income and a credit score of at least 620.
With non-conforming loans, the qualification requirements and terms are up to the lenders’ discretion, which can result in more flexible and less stringent criteria.
Lenders for Conventional and Non-Conventional Mortgages
So, what is the difference between jumbo loans and conventional loans? The answer to this, ultimately, boils down to the amount of financing you need, and the requirements. The right financing option for you, ultimately, depends on your situation. At mbanc, we will help you identify the right product for your specific needs.