What are Jumbo and Conforming Loans?
When buying a home, there’s usually a lot of confusion around the mortgage process. What loan do you need? What different types of loans are there?
One of the biggest areas of confusion is the difference between a jumbo loan and a conforming loan. Which can you expect to need when buying your next home? What happens if you need a jumbo mortgage? Keep reading to answer these questions and more.
What is a Jumbo Loan?
First, let’s talk about jumbo loans. As the name suggests, jumbo loans are for very large mortgages. These are only available in certain U.S. counties and they have to be in excess of $484,350.
Because they fall outside of conforming loan restrictions, they aren’t backed by Fannie Mae or Freddie Mac. Any non-conforming jumbo loans are loans that exceed the jumbo limit in their county, usually only for special instances such as if the borrower is very well-off or seeking an interest-only mortgage.
How are jumbo mortgages used to buy homes? Whenever you purchase an expensive property that needs to be financed, you’ll need a jumbo mortgage that comes with different rules. They usually carry higher interest rates than conventional mortgages, and they’re harder to qualify for.
Here’s what you’ll need to qualify for a jumbo mortgage:
- High credit score – You’ll need a credit score that’s above “fair” or 620. Many lenders want a credit score above 700.
- Credit history – Along with a high score, you’ll also need to show you’re able to pay your accounts responsible. Even a single missed payment could be enough to disqualify you.
- Large down payment – As you might expect, bigger loans require bigger down payments. While you might only need to put 2.5% on a conventional or conforming mortgage, you’ll need much higher for a jumbo loan.
- Mortgage payments – Aside from the downpayment, you’ll also need to have more money in your account to show you can afford several months of higher mortgage payments.
- Debt-to-income ratio – Your debt-to-income ratio will need to be lower to show you aren’t biting off more than you can chew.
What is a Conforming Mortgage
Now that you know what a jumbo loan is, let’s talk about conforming mortgages. A conforming mortgage is any mortgage that fits with the requirements set by Fannie Mae and Freddie Mac. These are the two government sponsor entities that buy mortgages from banks to sell to investors.
Another term that’s often used in relation to a conforming loan is a conventional mortgage. A conventional mortgage is any home loan that is not connected with the government, such as an FHA or VA loan. The national maximum for conforming conventional loans is currently $484,350 for a single-unit home, though this number changes every year.
In competitive areas where housing costs are higher, you’ll likely see a higher maximum loan limit. For places like New York City and San Fransisco, this maximum can be over $700,000.
Finally, most conventional loans are backed by the federal government, making them more reliable for lenders and the average home buyer. Lenders take on more risks when they take on a jumbo mortgage.
Which Type of Loan Do You Need?
Now that you know the difference between these mortgage types, which is right for you? It will all come down to your financial situation as well as the cost of the home you’re currently purchasing. If you’re getting a home under the $484,350 mark, you won’t need to consider a jumbo loan.
Knowing the difference between a jumbo loan and a conforming loan will help you stay educated as you start the mortgage process for yourself. The more you know, the more prepared you’ll be to make the right financial choices about your future.