Jumbo Mortgage vs. Conventional Mortgage: Which is Right for You?

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Many homeowners purchase regular houses with conventional mortgages, but homeowners looking to purchase an expensive property may need a jumbo mortgage. 

Most mortgage loans in the US are guaranteed by Fannie Mae or Freddie Mac. These government-sponsored enterprises (GSEs) annually set limits on the loans they guarantee. While the current limit for most states is $766,550, mortgage loans can exceed this amount. Large mortgage loans greater than the Federal Housing Finance Agency (FHFA) loan limit are called jumbo mortgages.

Let’s investigate the differences between conventional and jumbo mortgage types. 

Jumbo mortgages

A jumbo mortgage amount exceeds the loan limits set by the FHFA. GSEs Fannie Mae and Freddie Mac can’t guarantee these over-limit or non-conforming mortgages, so the lender incurs more risk. This may make jumbo loans harder to qualify for. 

Jumbo loans are created for expensive properties such as luxury homes or houses in high-cost counties. While approval criteria for jumbo loans are more stringent compared to conventional mortgages, there typically isn’t a big difference in interest rates or the application process.

How to obtain a jumbo mortgage

Here are a few things to remember when considering a jumbo mortgage.

Check your credit report: Jumbo loan lenders may have higher credit score requirements than conventional mortgage lenders. You can improve your approval chances by correcting any errors in your credit report, such as accounts with an incorrect current balance. If your score is too low, you may need to improve your credit before starting your mortgage application. 

Prepare your cash reserves: Jumbo loans require a large amount of funds to keep up with your mortgage payments. You may need to maintain around 12 months’  worth of payments in your bank account as a cash reserve. 

Lower your debt-to-income ratio (DTI): Your DTI is your total monthly debt divided by your gross monthly income. It can be a good idea to pay down as much of your debt as possible before applying for a jumbo mortgage, as lenders typically prefer a low DTI.

Down payment: Talk to your lender about down payment expectations. Some lenders require a down payment of around 30% of the home price. Others may accept 10-20%.

The application process for a jumbo mortgage is similar to a conventional mortgage. Once you've found your home and chosen the lender, you'll apply for a mortgage with the required documents. You’ll need a home appraisal, and the lender evaluates your application based on factors like your creditworthiness, DTI, income, cash reserves, and down payment.

Your lender will let you know if additional documents are needed to complete your application. The last step is to make your down payment and close on your home.

The pros of a jumbo mortgage

Jumbo mortgages offer several benefits, including:

1. Higher loan limits: A jumbo loan may get you access to a larger loan than a conventional mortgage. Jumbo mortgages are useful when buying a home that costs more than the FHFA limit in your state.
2. Competitive interest rates: The difference between conventional and jumbo mortgage rates may range from 0.25% to 1%. Sometimes, jumbo loans may offer a lower rate. 
3. Chance to buy a high-value home: A jumbo loan provides the opportunity to buy a more expensive home, whether it’s a luxury property or a house in a high-priced area. 

The cons of a jumbo mortgage

While a jumbo loan can bring you closer to your dream home, there are downsides to consider.

1. Strict eligibility criteria: Approval criteria like a high credit score, cash reserves, low debt, and high income may not be realistic for most buyers. 
2. Large down payments: Lenders typically expect larger down payments from buyers, sometimes as high as 30%. 
3. Proportionally high closing costs: Since closing costs are typically a percentage of the loan, a larger loan means higher closing costs.

Conventional mortgages

Conventional or conforming mortgages are for homes priced within the FHFA loan limit. Since Fannie Mae and Freddie Mac guarantee these loans, they present a lower risk to lenders. As a result, lenders have more relaxed approval criteria for borrowers. They may accept smaller down payments, too. A conventional mortgage is ideal for people seeking homes priced at $766,550 or less in most states. 

How to obtain a conventional mortgage

Conventional mortgages have four main steps: prequalification, application, qualification, and closing. As with jumbo mortgages, you'll shop around for different lenders and consider pre-approval options. After reviewing your options, you'll submit a formal application with the necessary documents. Then, your lender checks your credit score and evaluates your finances. If you're approved, you can make your down payment and close on the property.

The application process is not very different from the process for jumbo loans. You may be approved for a smaller down payment (some government-backed loans, like FHA loans, accept as little as 3.5%), a moderate credit score, and no cash reserves. Even so, it’s usually beneficial to compare different lenders to get the best rates and terms. 

The pros of a conventional mortgage

While conventional mortgages don’t offer the same high borrowing limits as jumbo mortgages, they come with several benefits.

1. Flexible eligibility criteria: Conventional mortgages typically require lower credit scores and higher DTI requirements than jumbo mortgages.
2. More lenders to choose from: Conventional mortgages aren’t as risky for lenders as jumbo loans, so more lenders issue them. 
3. Accessible to most borrowers: Most conventional mortgages are designed to help homeowners. Applicants don’t need a high income to apply, making these loans accessible to many people. 

The cons of a conventional mortgage

Conventional loans have some drawbacks that aspiring homeowners should be aware of.

1. Lower borrowing limits: Conventional mortgages are only for homes priced below the FHFA borrowing limit. 
2. Fewer options in high-cost areas: Buyers living in areas with expensive real estate may not be able to find a house they can afford with a conventional mortgage. 

Jumbo vs. conventional mortgage: What to choose

For most buyers, the choice between a jumbo mortgage and a conventional mortgage comes down to three key factors.

Property value: The cost of the home you want to buy is the main deciding factor. If the cost exceeds the FHFA limit, you will have to get a non-conforming loan like a jumbo loan. If the cost is under the limit, then you won’t need a jumbo loan. A conventional mortgage will work just as well.

Financial circumstances: Jumbo loans can make sense for high earners with great credit and enough liquidity to satisfy the lender. Buyers with an unstable income who lack the necessary cash reserves are less likely to qualify for a jumbo loan. 

Risk tolerance: A qualified loan is a type of loan that has specific features that limit risk and help ensure you can afford your loan, such as limits on the loan’s APR and limits on fees the lender can charge. Some jumbo loans are non-qualifying (non-QM) loans that don't follow the guidelines set by the Consumer Financial Protection Bureau. Borrowers opting for a non-QM loan must ensure they're getting good terms.

Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third party websites.