What’s the Difference: Jumbo Mortgage vs. Conventional. Benefits

There has been a significant shift in the mortgage lending industry during the past few years, with the most noticeable development being the rising popularity of jumbo mortgages. As a guide to the two most prevalent forms of mortgages, jumbo mortgage vs. conventional, we’ve put together a primer to help you make more informed decisions when speaking with a lender.

Jumbo Mortgage vs. Conventional 

The decision between a jumbo mortgage vs. a conventional is usually straightforward.

The vast majority of conventional loans must fall within conforming lending limitations. In most parts of the United States, your loan amount must be less than $647,200. If you require a larger loan amount, you’ll most likely use a jumbo loan.

Buying or refinancing a home with a jumbo loan will bring up some significant variations that you should know. For example, you’ll require a higher credit score and a larger down payment to get a mortgage. What you should be aware of is as follows.

The Difference Between Jumbo Mortgage vs. Conventional

A jumbo mortgage vs. a conventional mortgage are two different types of financing that borrowers can use to purchase a property. Homeowners must meet specific eligibility requirements for both loans, including minimum credit scores, income limits, ability to repay, and down payment amounts. 

Mortgages that the private-sector lenders provide and underwrite as opposed to government-sponsored entities such as the Federal Housing Administration (FHA), and Veterans Affairs (VA).

Although they both serve the same objective (to protect property), these mortgage products differ in several important ways. Jumbo mortgages are essential when purchasing homes with high purchase prices—often in the millions of dollars—and refinancing existing loans. 

In contrast, conventional mortgages are smaller in size and more suited to the requirements of the ordinary homebuyer. The government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac, may also make an offer to purchase them.

How a Conventional Loan Works

Conventional loans are in two categories: conforming and non-conforming loans. According to the Federal National Mortgage Association, obtaining approval for conforming loans is relatively easy. Even though the government does not back non-conforming loans, they may be a more cost-effective alternative.

The Federal Housing Finance Agency (FHFA) sets and adjusts conforming loan limits annually to keep pace with the growing housing market. The loan limit for a single-unit property in 2021 was $548,250, a rise over the previous year’s limit of $510,400. In 2022, they will rise to a starting point of $625,000 annually. 

Conforming loans adhere to government regulations, which include those governing the down payment, credit rating, loan limit, and debt-to-income ratio (DTI), among other things. When applying for a conforming loan, buyers can choose between 15-year, 20-year, or 30-year mortgage terms. The length of the loan chosen will directly impact the amount of mortgage interest throughout the loan.

In the case of a conventional loan, a non-conforming loan does not comply with the established parameters outlined above. Non-conforming loans are more difficult to qualify for. They don’t have the government’s backing, but they are often less expensive than conforming loans. The lender has the whim to determine the loan eligibility and terms. Thus, they are subject to change.

Qualifying for a Conventional Mortgage

Conventional loan requirements include:

• Having a good credit score
• DTI ratio that is fair
• Having some cash reserves.
• Obtaining approval for a jumbo mortgage

The qualification process for a jumbo loan is very similar to the qualification process for a conforming loan. The lender will look at your assets, income, and credit score. However, there are some distinctions between the two types of loans. 

Because lenders take on additional risk with jumbo loans, qualification standards for jumbo loans are typically higher than those for conforming loans. 

Below are some of the most significant qualifications differences between jumbo and conventional mortgages.

Credit Score

Your credit score is a measurement of your past ability to make timely payments. It is used to help you qualify for loans. You might get a conventional loan with a good credit score. If your credit score is lower than excellent, it’s unlikely to get a jumbo loan. You usually have to have an excellent or higher credit score to qualify for one of these. 

Reserves 

Most lenders will look at your reserves when getting approval for a jumbo loan. These reserves aid in the protection of lenders against defaults.

Down Payment 

Jumbo loans frequently necessitate larger down payments than traditional mortgages. It is not uncommon for lenders to demand payment of at least 20% when it comes to jumbo loans.

Income 

If you want to meet the criteria for a jumbo loan, you might need to have a higher income. You require sufficient income to pay back the mortgage, and jumbo loans are greater.

Debt Ratio

The back-end ratio is critical. It informs lenders that you can meet all of your monthly obligations, not just your mortgage payment. When you have high DTIs, it might be a sign that you cannot make your monthly payments. Your ability to repay a mortgage can be hampered by car payments, credit card bills, and other debts that accumulate over time. 

The DTI standards for jumbo loans differ from lender to lender.

Loan-to-Value Ratio

The loan-to-value (LTV) ratio for jumbo loans is more stringent than for conforming mortgages. Your loan-to-value (LTV) ratio helps determine your property’s worth compared to the loan amount. If you want to determine your loan-to-value ratio, take your entire loan amount and divide it by the assessed value or buying price of the home. Jumbo loans may mandate you to have a loan-to-value ratio of 80% (i.e., the loan is only for 80%of the price of your home).

Is a Jumbo Loan a Bad Idea?

A jumbo loan isn’t a bad choice if you can comfortably remit the monthly payments on your current home. As with any house loan, your income and current debt burden determine the amount you can borrow.

With the help of a mortgage calculator, you can approximate your possible monthly payment and determine whether or not a jumbo loan is a good option for you.

How to Avoid a Jumbo Loan

If you desire to have a high-priced property but don’t want to take out a jumbo loan, two alternatives may be suitable for you:

1. Submit a large down payment that can bring your mortgage balance down to or below the local loan limits.
2. When you take out a ‘piggyback loan,’ it means you accept a second mortgage to boost your down payment while simultaneously decreasing the size of your initial mortgage.

A piggyback loan allows you to take up a second mortgage simultaneously when you take out your first mortgage. The second mortgage is often in the form of a home equity line of credit (HELOC), and it serves as a down payment to help reduce the amount of money you owe on your primary mortgage in the first place.

If you take out a piggyback loan, you’d have to make double monthly mortgage payments. Along with the primary mortgage, you’re also submitting interest on the home equity line of credit. 

Final Thought on Jumbo Mortgage vs. Conventional 

Obtaining a mortgage nowadays is an unnecessarily difficult process fraught with possible pitfalls. When considering jumbo mortgage vs conventional, the former is significantly more lucrative to a bank seeking clientele from whom it may cross-sell additional financial goods, such as private wealth management services. A further disadvantage of jumbo mortgage loans is that they don’t have the government or government-sponsored corporations such as Fannie Mae or Freddie Mac’s backing.

Buyers seeking a large loan must have substantial assets and great credit history to get consideration for one.