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How Is a Jumbo Loan Different than a Conforming Loan?

What you'll learn: Is a jumbo loan right for you


Home loans come in all sizes – from small and medium to large and jumbo. The amount you need to borrow determines which mortgage will be right for you. Today we'll go over what is a jumbo loan and the benefits of a jumbo loan. We'll also discuss what makes a mortgage jumbo, and can a jumbo loan be a conforming mortgage? Read on to get all your questions answered.

How is a jumbo loan different than a conforming loan?

If you're considering buying a home, odds are you're not paying in full and will need financing. One of the first pieces of information you'll need to understand is loan limits. Every mortgage product has a maximum loan amount. You may have heard terms like jumbo and conforming limits in your mortgage search. Let's explore this more and answer the question: what is a jumbo loan? That way you can decide which type of mortgage makes sense for you.

What is the difference between a jumbo loan and a conforming loan?

Understanding the difference between a jumbo loan and a conforming loan is simple. A jumbo loan exceeds conforming loan limits. More expensive homes often need jumbo financing. Each year, the Federal Housing Finance Agency (FHFA) sets conforming lending limits. For 2021, the conforming lending limits are:

  • $548,250 in most counties in the U.S. Each year, FHFA publishes a conforming loan limits map. With this map, you can see what the limits are for different locations.
  • Up to $822,375 in high-cost areas like California, Hawaii, Alaska, and Washington DC.

If a loan amount exceeds the conforming loan limits for the property's location, it's considered a jumbo loan. Here is an example of lending limits. If you need a mortgage loan of $600,000 in Kentucky, where the loan limit is $548,250, you would need to apply for a jumbo loan. However, if you took out a $500,000 loan in that same area, your loan would be conforming.

Initially, the FHFA created the conforming loan limits to help banks keep on lending money. They also wanted to make buying homes more affordable. To have more money available to new borrowers, lenders would sell their mortgages to investors rather than wait for the loan to be repaid.

The two largest investors are government-sponsored enterprises, Fannie Mae (FNMA) and Freddie Mac (FHLMC). Reselling mortgages to investors gives the lender the flexibility and liquidity to offer more home loans. Plus, it allows them to provide lower rates on these mortgages since the government backs them.

How is getting a jumbo loan different?

Now that you know what a conforming loan is, and its background, let's look at jumbo mortgages. Aside from being a larger loan amount, jumbo loans often have different requirements. Because there is more risk, these jumbo loans can be more challenging to qualify for. Some differences in qualifying include:

  • Lower Debt-to-Income Ratio (DTI): The DTI represents a borrower's debt compared to their income. It's a calculation that lenders use to measure the borrower's ability to repay the loan.

Here's an example:

  • $5,000 before tax income
  • $2,000 debts (credit cards, loans, mortgage)
  • $2,000/$5,000 = 40% DTI

Lenders will likely require a lower DTI to approve your jumbo loan application; it will need to be 43% or lower in many cases. Compare that to a conforming loan where the maximum DTI can go as high as 50%.

  • Higher Credit Score: Many lenders will require higher credit scores as well. Specific scores vary based on the lender. But it's not uncommon to see minimums between 700 and 720 for jumbo loans, compared to 620 for a conforming loan.
  • More Paperwork: It's a good idea to get all of your financial paperwork organized before applying. That includes proof of assets, income, and other property information. You'll likely need to provide all of your tax documents as part of your application too.
  • Reserves: Lenders may also want to see proof that you have enough cash in the bank to pay a year's worth of mortgage payments. So, if your loan payment is $3,000 a month — you'd need to have $36,000 after the loan closes.

After application approval, some other differences include:

  • Higher Down Payment: Jumbo loans usually come with a 20% to 25% down payment. In comparison, conforming loan down payments can be 10% or lower. However, this isn't true in every case, so be sure to ask your lender about their specific policies. If you're wondering; Can a jumbo loan be a conforming mortgage? Here's how - When trying to get a larger loan, it may be possible to take out a first (within the conforming limits) and second mortgage (for the remainder) instead of a jumbo.
  • Potentially Higher Interest Rates: In recent years, interest rates on jumbo loans have come down considerably. But there's still a chance you'll pay higher rates than you would with a conforming loan.
  • Other Costs: Jumbo loans tend to require more appraisals and have higher closing costs. So, factor that into your budget.

What are the benefits of a jumbo loan?

With a jumbo mortgage, you'll only have one payment. Plus, you'll get the funds you need for your luxury home or vacation property. Although lender requirements for these higher loan amounts can be stringent, it's worth it. That's because getting one opens the door to a wider range of properties.

To learn more about PenFed loans or determine which loan is right for you:

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1Rates are updated daily at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on discount point, which equals percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, non-conforming, fixed-rate loan. Loan amount of $1,009,000; loan-to-value ratio of 70%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.