Jumbo vs. Typical mortgage: Which is greatest?
Jumbo vs. conventional credit overview
Choosing between a jumbo or a conventional loan is usually easy.
Most conventional loans must be within compliant credit limits. That means your loan amount should be under $ 548,250 in most of the United States. Typically, when you need a larger amount of loan, you would use a jumbo loan.
Of course, there are some key differences to be aware of when buying or refinancing with a jumbo loan. For example, you may need a higher credit rating and a larger down payment. Here’s what you should know.
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What is the difference between a jumbo loan and a conventional loan?
Most conventional loans must be within the local credit limits set by Fannie Mae and Freddie Mac. Jumbo loans, on the other hand, are intended for mortgage amounts that are above the corresponding credit limits. So, jumbo mortgages essentially start where traditional loans leave off.
- In 2021, the compliant credit limits in most of the United States are $ 548,250 for a single family home
- That means jumbo loans are typically any amount over $ 548,250
However, in some high-priced real estate markets, these credit limits are more generous. You can get a compliant single family loan up to $ 822,375 in the most expensive parts of the country.
Jumbo credit limits vary depending on the lender. But they usually run into the millions. So if you need to borrow more than the local credit limits allow, you will likely need a jumbo mortgage.
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A note on “conventional” and “compliant” loans
Technically, a conventional loan is any mortgage that is not covered by the federal government. So anything that is not an FHA loan, VA loan, or USDA loan is considered a conventional loan.
Most traditional loans can also be referred to as “compliant loans” as they meet Fannie Mae and Freddie Mac’s lending requirements (including the credit limits above).
The two terms – “conventional” and “conformal” – are often used synonymously. And in this article, we’ll use “conventional” for compliant loans that meet Fannie and Freddie’s standards.
Jumbo vs. conventional loan comparison table
The size of the loan is not the only difference between a conventional and a jumbo mortgage.
Because jumbo loans are so much larger, mortgage lenders have stricter underwriting standards on these types of loans. You especially want to be sure that homeowners can afford the monthly payments.
What does this mean for jumbo vs. conventional loan requirements? Here is a brief overview:
|Conventional (compliant) loan||jumbo loan|
Maximum loan amount
|$ 548,250–$ 822,375, depending on local home prices||Up to several million. Varies depending on the lender|
|Minimum deposit||3%||Usually 10-20%|
|Need Private Mortgage Insurance (PMI)?||Yes, if the deposit is less than 20%||Usually yes, if the deposit is less than 20%|
|Minimum Credit Score||620||Often 680-740|
|Maximum (DTI)||Usually 43%||Usually 45%|
|Cash reserves required||0-6 months of home ownership expenses as savings||Up up to 12 months of home ownership spending in savings|
|Eligible property types||1-4 unit properties, including primary residences, holiday homes and investment properties||Large selection. Limitations by individual lenders|
It is important to note that since jumbo mortgages are non-compliant loans (also called “non-QM loans”), lenders can set their own requirements.
Things like the minimum credit score, maximum loan amount, and minimum down payment requirements can vary widely from one lender to the next when purchasing a jumbo loan.
So if you are about to qualify, it pays to look for a lender who is more flexible with their eligibility criteria.
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Where Do Jumbo Loans Start?
In most cases, a jumbo loan is one that you more than borrow $ 548,250. Because that’s the standard credit limit on conventional single-family mortgages.
However, if you are buying in one of the most expensive real estate markets in the country, jumbo loans start at $ 822,375. This includes big cities like LA and New York as well as all of Alaska and Hawaii.
Compliant mortgage credit limits are set by the Federal Housing Finance Agency (FHFA). And it explains that its upper limits are “a function of the mean residential values in the area”. So there is a sliding scale for the credit limit that depends on the average home price in a given area.
You can use our search tool to find the credit limit in your own zip code. This will show you the maximum compliant credit limit that is equal to the minimum jumbo loan amount.
How Much Can I Borrow with a Jumbo Loan?
Some lenders prefer to borrow larger sums than others. So if you want to borrow several million dollars, you may need to shop more carefully than someone borrowing less than $ 1 million.
However, multi-million dollar jumbo loans are quite common in high-cost areas. So it shouldn’t be too difficult to find what you’re looking for.
Many lenders, including Bank of America and Quicken Loans, routinely lend up to $ 2 million. And some go higher. Note, however, that many lenders are shy about describing their jumbo loan offers online. So you will likely have to call and chat with a loan officer to see what’s available.
If you want to know how much you can actually borrow with a jumbo loan, get advance approval from a mortgage lender.
The pre-approval process looks at your income, assets, credit, and down payment to determine how much you can borrow. This is the only “real” way of knowing how much home you can afford.
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Are Jumbo Mortgage Interest Rates Higher?
Jumbo loans traditionally have slightly higher interest rates than traditional mortgage loans. But that’s not always the case.
In fact, Bankrate’s survey on the day this was written (mid-August 2021) showed average jumbo rates actually lower than traditional ones. And we quickly found a well-known lender who offers exactly the same interest rate for both loans.
As with all mortgage products, lenders evaluate your risk as a borrower when setting the interest rate they offer you. And some are more lenient than others.
So, regardless of the type of loan you want, you should shop around among lenders to find your lowest mortgage rate and the best deal.
How Hard is it to Qualify for a Jumbo Loan?
Compliant mortgage requirements are pretty loose. It is often possible to qualify with as little as 3% less and a FICO score of 620 or higher.
In contrast, lenders have stricter requirements for someone who wants a jumbo loan. That’s because they’re putting a lot of money on the line. And you can’t share that risk with Fannie Mae or Freddie Mac.
You can take some pressure off yourself by paying a large down payment. If you drop more than 20%, lenders can be more forgiving of things like your creditworthiness or debt-to-income ratio (DTI).
But when that is not possible, expect excellent credit, not too much existing debt, and adequate cash reserves. (Cash reserves are cash left over after down payment and closing costs that can be used to cover mortgage payments in an emergency.)
The more you borrow and the lower your down payment, the more stringent your lender’s qualification criteria become. For more information on Jumbo Loan Requirements, please visit here.
Is Jumbo Loan a Bad Idea?
A jumbo loan is not a bad idea if you can easily afford the monthly mortgage payments. As with any home loan, this will depend on your income and your current debt load.
A mortgage calculator can help you estimate your future monthly rate and find out if a jumbo loan makes sense for you.
Of course, nobody likes to be in debt. And if you have alternatives – maybe a larger down payment or a smaller house – these should be considered.
But most people consider mortgages a “good” debt. And a bigger loan can even offer benefits across the board, like more home equity and higher profit on sales. So, weigh the risks and rewards of your credit options, as you would with any major financial decision.
How can I avoid a jumbo loan?
If you want a high-priced home but would rather avoid a jumbo loan, there are two options that might help:
- Make a down payment large enough to bring your mortgage amount below the local credit limit
- Consider a “piggyback” loan, which means taking out a second mortgage to add to your down payment and reduce the size of your first mortgage
With a piggyback loan, you can take out a second mortgage at the same time as your first mortgage. The second mortgage is usually a home equity line of credit (HELOC) and is used as a down payment to reduce the amount you take out on the main mortgage.
Of course, a piggyback loan means you have two monthly mortgage payments. And you pay interest on the HELOC as well as the first mortgage. So if you are thinking about this strategy, be sure to run the numbers on a piggyback loan and a jumbo loan to see which is really cheaper in the long run.
Jumbo vs. Conventional Loans: The Bottom Line
The bottom line is that there is usually no competition between jumbo and traditional loans. If you borrow within the local credit limits, you can get a conventional / compliant loan. And if your loan amount exceeds that limit, you will get a jumbo loan.
Yes, the jumbo lending rates can sometimes be higher than the traditional lending rates. But that’s not always the case.
As with any mortgage, you can find the best deal by shopping among the lenders. And with mortgage rates at historic lows today, there are good deals for conventional and jumbo borrowers alike.
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