Overview of jumbo loan vs conventional loan
The choice between a bulky or traditional loan is usually easy.
Most conventional loans must be within matching loan limits. This means that your loan amount must be less than a dollar In most parts of the United States, if you need a larger loan amount, you usually use a mega loan.
Of course, there are some key differences that you should be aware of when buying or refinancing with a huge loan. For example, you will need a higher credit score and a larger down payment. Here’s what you should know.
Compare mortgage options. START HERE (December 24, 2021)
In this article (go to…)
What is the difference between a jumbo loan and a conventional loan?
Most conventional loans must be within the domestic loan limits set by Fannie Mae and Freddie Mac. Jumbo loans, on the other hand, are for mortgage amounts above Matching loan limits. So huge mortgages are basically moving from where conventional loans end up.
- In 2021, in most of the US, the maximum matching loan is $ For a single family home
- This means that huge loans are usually of any amount above $
However, these loan limits are more generous in some high-priced real estate markets. In the most expensive parts of the country, you can get a single-family-compatible loan of up to US$[current_loan_limits max=TRUE].
Jumbo loan limits vary by lender. But they usually go by the millions. So if you need to borrow more than your local loan limits allow, you will likely need a hefty mortgage.
Compare mortgage options. START HERE (December 24, 2021)
A note on “conventional” and “matching” loans
Technically speaking, a conventional loan is any mortgage that is not backed by the federal government. So anything that isn’t an FHA loan, VA loan, or USDA loan is considered a conventional loan.
Most conventional loans can also be called “matching loans,” because they meet the lending requirements of Fannie Mae and Freddie Mac (including the loan limits listed above).
The two terms – “traditional” and “identical” – are often used interchangeably. And in this article, we use the word “traditional” to mean matching loans that meet Fannie and Freddy’s criteria.
Jumbo vs Conventional loan comparison chart
Loan size is not the only difference between a conventional and jumbo mortgage.
Since mega loans are much larger, mortgage lenders have more stringent collateral standards for this type of loan. They want to be very confident that the homeowners can afford the monthly payments.
What does this mean for jumbo versus conventional loan requirements? Here is a quick overview:
|traditional (matching) lend||jumbo lend|
Maximum loan amount
|$–$[current_loan_limits max=TRUE]According to local housing prices||Up to several million. Varies by lender|
|Minimum Down Payment||3%||usually 10-20%|
|Is private mortgage insurance required?||Yes if the down payment is less than 20%||Usually yes if the down payment is less than 20%|
|Minimum credit score||620||Often 680-740|
|Max (DTI)||usually 43%||usually 45%|
|Cash reserves required||0-6 months home ownership expenses in savings||WLFrom p to 12-month home ownership expenses in savings|
|Eligible property types||1-4 unit real estate, including primary residences, vacation homes, and investment properties||wide range. Restrictions set by individual lenders|
It is important to note that because bulk mortgages are non-conforming loans (also called “QM-non-compliant loans”), lenders have to define their own requirements.
Things like minimum credit score, maximum loan amount, and minimum down payment requirements can vary a lot from one lender to another when you’re shopping for a huge loan.
So if you are about to qualify, it is worth shopping for a more flexible lender with its own eligibility criteria.
Check your eligibility for a home loan. START HERE (December 24, 2021)
Where do mega loans start?
In most places, a jumbo loan is the one where you borrow more than $. Because this is the standard limit for the loan Conventional mortgages for single family homes.
But, if you are buying in one of the most expensive housing markets in the country, mega loans start at $[current_loan_limits max=TRUE]. This includes major cities such as Los Angeles and New York, as well as Alaska and Hawaii.
Loan limits are imposed on matching mortgages by the Federal Housing Finance Agency (FHFA). She explains that the caps are “a function of the average home values for the local area.” So, there is a sliding scale for loan limits depending on the average home price in any given area.
You can use our search tool to find the loan limit in your zip code. This will tell you the corresponding maximum loan amount, which is the same as the maximum loan limit minimum Jumbo loan amount.
How much can I borrow with a huge loan?
Some lenders are more comfortable lending large amounts of money than others. So, if you want to borrow several million dollars, you may have to shop more carefully than borrowing someone under a million dollars.
But mega loans in the millions of dollars are very common in high cost areas. So it shouldn’t be too hard to find what you need.
Several lenders, including Bank of America and Quicken Loans, routinely lend up to $2 million. Some rise. But note that many lenders are shy about providing details of their massive loan offers online. So it is likely that you will have to contact and chat with a loan officer to see what is available.
If you want to know how much you can actually borrow with a huge loan, get pre-approved from a mortgage lender.
The pre-approval process looks at income, assets, credit and down payment to determine how much you can borrow. This is the only “real” way to find out how much you can buy from a home.
Get pre-approved for a home loan. START HERE (December 24, 2021)
Are jumbo mortgage rates higher?
Traditionally, mega loans have slightly higher interest rates than those on traditional mortgage loans. But this is not always the case.
In fact, on the day this was written (mid-August 2021), the Bankrate survey showed that jumbo average rates are actually lower than traditional rates. We soon found a big name lender offering the same rate for both loans.
As with all mortgage products, lenders assess your risk as a borrower when determining the rate they will offer you. Some are more tolerant than others.
So you should shop among the lenders to find the lowest mortgage rate and the best deal, no matter what type of loan you want.
How hard is it to qualify for a mega loan?
Matching loose mortgage requirements perfectly. It is often possible to qualify with only 3% and a FICO score of 620 or higher.
On the contrary, lenders have stricter requirements for who wants to get a huge loan. This is because they put a lot of money on the line. Nor can they share this risk with Fannie Mae or Freddie Mac.
You can relieve some of the stress by making a large down payment. If you give more than 20%, lenders may be more forgiving about things like your credit score or your debt-to-income ratio (DTI).
But, if this is not possible, then expect that you need excellent credit, not a lot of current debt, and adequate cash reserves. (Cash reserves are remaining liquid funds after You’ve paid off your down payment and closing costs, which can be used to cover emergency mortgage payments.)
Obviously, the more you borrow and the lower your down payment, the more stringent your lender qualification criteria are likely to get. You can read more about the jumbo loan requirements here.
Is jumbo loan a bad idea?
A jumbo loan is not a bad idea if you can comfortably afford your monthly mortgage payments. As with any home loan, it depends on your income and current debt burden.
You can use a mortgage calculator to estimate your future monthly payment and see if a jumbo loan might be beneficial for you.
Of course, no one likes to be in debt. And if you have alternatives — a larger down payment, perhaps, or a smaller home — you’ll want to consider them.
But most people see mortgages as “good” debt. And a larger loan can offer other benefits, such as more real estate equity and more profit on the sale. So, weigh the risks and rewards of your loan options, as you would any major financial decision.
How can I avoid a huge loan?
If you want an expensive home but would prefer to avoid a huge loan, there are two options that can help you:
- Make a down payment that is large enough to reduce your mortgage amount below local loan limits
- Consider a ‘loan on the back’, meaning you take out a second mortgage to supplement the down payment and reduce the size of the first mortgage.
A back loan allows you to get a second mortgage at the same time as your first mortgage. The second mortgage is usually a home equity line of credit (HELOC), and it works as a down payment to help reduce the amount you borrow from the primary mortgage.
Of course, a loan on the back means that you have two mortgage payments per month. And you pay interest on the HELOC in addition to the first mortgage. So if you are considering this strategy, you should run the numbers on a loan on the back And Huge 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 mega loans versus conventional loans. If you are borrowing within the local loan limits, you can get a conventional/compatible loan. And if your loan amount exceeds this limit, you will get a huge loan.
Yes, mega loan rates can sometimes be higher than traditional loan rates. But this is not always the case.
As with any mortgage, you can find the best deal by shopping between lenders. And with mortgage rates today at historic lows, there are good deals to be had for traditional and jumbo borrowers alike.
Ready to get started?
Show me today’s rates (December 24, 2021)
The information on the Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed here are those of the author and do not reflect the policy or position of Full Beaker, its officers, parents, or affiliates.