The difference between a jumbo loan and a conventional loan boils down to the loan amount. If you’re above the conventional loan limit set by Fannie Mae or Freddie Mac, a jumbo loan would be the best fit for your purchase. If you’re searching for a home that falls below the limit, a conventional loan is your best bet since conventional loan qualifications are less stringent.
For instance, most counties have a maximum conventional loan limit of $647,200 for a single-family home, meaning any amount exceeding that limit can be a jumbo loan. Likewise, some high-price areas, such as Washington D.C., have a maximum loan limit of $970,800, driving up the minimum amount for a jumbo loan. Of course, you can always reach out to an OVM Financial loan officer to determine the loan limit for your area.
To help you compare a jumbo loan vs. conventional loan, we’ve compiled information about the differences between these two options.
Understanding jumbo loans
Because jumbo loans don’t have government-backing, they represent an increased risk for lenders. If you default on a jumbo loan, your lender is stuck with the debt. That’s why jumbo loans have more stringent qualifying requirements for borrowers.
If you apply for a jumbo loan, lenders typically look at the same markers they would for conventional loans:
- Proof of income
- Credit score and history
- Debt-to-income ratio
But there are some key differences. Jumbo loan lenders usually require a minimum credit score of 620. However, if you have a minimum credit score of 680, your lender will offer better terms. Lenders also require you to have 12 months of homeownership expenses reserved and a minimum down payment of 10%. If you’re able to put down 20%, you can enjoy more favorable terms.
Traditionally, interest rates for jumbo loans are higher than those for conventional mortgages. However, the gap has decreased in recent years.
Familiarizing yourself with conventional loans
Similar to jumbo loans, some conventional loans can be nonconforming if they exceed the conventional loan limit of $647,200. However, conforming conventional loans offer better perks.
The difference between conforming loans vs. conventional loans is that conforming loans adhere to loan limits set by the Federal Housing Finance Agency and guidelines by Fannie Mae and Freddie Mac. This means lenders can offload your mortgage and its risk to government-sponsored enterprises (GREs).
As a result, conforming conventional loans offer a lower risk for your lender, which means more lenient qualifications and lower interest rates for you. Additionally, you’ll usually enjoy lower down payments of 3 to 20% for conventional loans.
Government guidelines require lenders to assess the following borrower attributes:
- A mortgage’s loan-to-value (LTV) ratio
- The total amount of the loan
Though lenders may vary in their independent loan-qualifying standards, most will want you to meet the following basic requirements in order to qualify for a conventional loan:
- A minimum credit score of 620
- Stable income
- A healthy debt-to-income ratio
- Proof of up to six months of reserved homeownership expenses
If you’re planning to purchase a home, reach out to our OVM Financial loan experts. They can help you compare jumbo loans vs. conventional loans and determine the best option for your home buying situation.