Key takeaways
- A jumbo loan is a type of conventional loan, considered nonconforming because it exceeds the loan limit set by the Federal Housing Finance Agency (FHFA).
- Jumbo loans come with more stringent lending guidelines due to their risky nature.
- Conforming loans have easier credit criteria and lower down payment requirements than jumbo loans.
Parsing through all the types of mortgages out there, you’re bound to come across two varieties that are often contrasted: jumbo loans and conventional loans.
A conventional loan, offered by a private lender, is what we usually think of when we think “mortgage” — a lump sum you borrow at a fixed interest rate that supplies the bulk of what you need to buy a home. Technically, a jumbo loan is a kind of conventional loan. Still, it is not a standard mortgage. It differs in several ways — the main one being the large amount of cash it lets you borrow, as its name implies.
Let’s look more closely at how jumbo vs. conventional loans compare.
Overview: Jumbo loans vs. conventional loans
A conventional loan is simply a mortgage that’s not backed by the federal government but originated, financed and guaranteed entirely through a private lender. Conventional mortgages can be either conforming or nonconforming. The former is a mortgage that meets the requirements set by the Federal Housing Finance Agency (FHFA); the most common of these stipulates that the size of the loan be set at or below certain dollar limits. These limits vary from state to state, and even by counties within states.
For 2024, the conforming loan limit is $766,550 in most areas, and up to $1,149,825 in higher-priced places. When a mortgage is “conforming,” it is eligible for Fannie Mae and Freddie Mac to buy it on the secondary mortgage market. Knowing that these government-sponsored entities, major players in the mortgage industry, can purchase a mortgage greatly reduces a lender’s risk in offering it.
A jumbo loan is a conventional loan. But since it doesn’t conform to the FHFA standards due to its size, it’s considered “nonconforming.” If you’re buying a high-priced home — higher than the norm — in your area, you’ll need a jumbo loan. This allows you to borrow the amount you need for the purchase, even though that amount is higher than the conforming loan size.
Many mortgage lenders offer jumbo loans up to $3 million or $5 million. You might be able to find jumbo loans in even higher amounts, especially if you work with a mortgage broker who’s a jumbo specialist.
Comparing jumbo and conforming loans: key differences
As we mentioned, jumbo and conforming loans are both conventional loans. Still, there are some key differences to be aware of.
Jumbo loans | Conforming loans | |
|---|---|---|
| Minimum credit score | 700 | 620 |
| Minimum down payment | 20-25% | 3-5% |
| Minimum DTI ratio | 36-43% | 43-50% |
| Cash reserves | Up to 12 months | Up to 6 months |
| Closing costs | 2-5% of the loan amount | 2-5% of the loan amount |
| Rates | Higher due to elevated risk | Could be lower, depending on your financial profile |
Qualifying for a jumbo loan vs. conventional loan
While there are several qualifying factors that impact whether you can get a jumbo loan (as opposed to a conventional loan), the most important is your credit score. The minimum accepted is higher for a start: 700 for the jumbo vs. 620 for the conventional loan. And while you can qualify with the minimum credit score, the best mortgage rates go to borrowers with scores of 740 or higher.
You should also be prepared to make the minimum down payment — which, not surprisingly, is typically a larger percentage of the purchase price — and meet the lender’s debt-to-income (DTI) thresholds, which tend to be lower (that is, take up less of your monthly earnings).
Not only are the credit score and down payment benchmarks much higher, but you’ll need a sizable amount of financial assets or cash reserves. And you’ll likely need a larger income since you’re seeking a bigger loan amount.
Mortgage rates for a jumbo loan vs. a conventional loan
Many jumbo loan rates may actually be lower than those on some conventional loan offers since lenders still want to remain competitive. Otherwise, jumbos tend to be influenced by the factors that move mortgage rates and interest rates in general, such as the benchmark federal funds rate the Federal Reserve sets. The particular interest rate you’ll get, of course, depends on your credit score, income, down payment, assets and current debt load. Most jumbo loans are conventional loans (backed by private lenders vs. a government agency). However, FHA jumbo loans and VA jumbo loans do exist — though the maximum amount you can borrow may not be as big as that of conventional jumbos.
How to decide which loan is right for you
Jumbo and conventional loans each have unique purposes, and it’s important to choose the right one for your situation and financing needs. There are a few things you should consider when weighing a jumbo loan vs. conventional mortgage.
You might benefit from a jumbo loan if you meet some of these criteria:
- You are purchasing a luxury home by local standards
- You are purchasing a home in an area with high cost of living
- You are a high earner with an excellent credit score
- Your monthly debt load is low (compared to your income)
- You need to finance but can make a down payment of 20% or more
A conforming loan may be a better option in one of these situations:
- You are purchasing a moderate home, priced within the local loan limits
- You have a lower income
- Your credit score is just “good” or “fair”
- You have little savings or financial assets
- You have limited funds available for a down payment
Jumbo vs. conventional loan FAQ
The lending criteria are tighter for jumbo loans because the loan amounts are higher. Plus, they pose an elevated risk to lenders compared to conventional loans that conform to FHFA standards, as they can’t be sold on the secondary mortgage market as easily.
Most lenders require a down payment of at least 20 percent to get a jumbo loan. Consequently, mortgage insurance isn’t required.
It’s possible to refinance a jumbo loan into a conventional loan. The jumbo’s current balance must be at or below the conforming loan limit, which is $766,550 for 2024 (or up to $1,149,825 in high-cost areas)
