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When it comes to securing a mortgage for your dream home, the world of home financing can seem like a maze of choices and decisions. You may think you need a conventional loan but depending on where you’re looking to buy—you may need a jumbo loan.
Does a “jumbo loan” mean it’s more expensive? Does a “conventional loan” mean your options are limited? Understanding the difference between these two types of loans is crucial; It can significantly impact your homeownership journey.
In this comprehensive guide, we’ll delve into the specifics of jumbo and conventional loans, their requirements, pros and cons, and help you determine which one aligns with your unique needs.
Understanding jumbo loans vs. conventional loans
Before we explore the intricacies of jumbo and conventional Loans, let’s establish a fundamental understanding of these terms.
What is a jumbo loan?
A jumbo loan is a mortgage that exceeds the set loan limits created by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac.
These loans are almost always used to finance higher-priced homes that fall outside the limits established for what is called a conventional loan. These loans are often necessary in high-priced housing markets such as in California or Hawaii.
What is a conventional loan?
A conventional loan, on the other hand, is a mortgage that falls within those conforming loan limits we just mentioned above, the ones established by GSEs.
These loans adhere to the guidelines and requirements set by these agencies and are the most common mortgage chosen by buyers.
Why is this important?
It’s essential to grasp the distinction between jumbo and conventional loans because making an informed decision can save you money, impact your eligibility, and ultimately determine whether you can secure the home of your dreams.
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These loans are typically characterized by their competitive interest rates, reasonable credit score requirements, and flexible down payment options.
Requirements for a conventional loan
These are going to vary by lender and by the specific loan product they’re offering. But, there are some general guidelines you can use to strategize.
Credit score
Qualifying for a conventional loan means you generally need a credit score of no less than 620, although a higher score can secure you better terms and lower interest rates.
Down payment
One of the attractive features of conventional loans is their flexibility regarding down payments. While a 20% down payment is often recommended to avoid private mortgage insurance (PMI), it’s possible to secure a variety of conventional loan products with as little as 3% down.
Pros and cons of a conventional loan
Pros
- Competitive interest rates
- Flexible down payment options
- Less stringent credit score requirements compared to some other loan types
- Ability to finance primary residences, second homes, and investment properties
Cons
- Private Mortgage Insurance (PMI) may be required with a down payment below 20%
- Stricter debt-to-income ratio requirements
- Limited options for financing high-priced homes
Jumbo loan basics
Jumbo loans are designed for larger mortgage amounts that exceed the conforming loan limits set by GSEs. These loans cater to individuals looking to purchase high-end properties or homes in expensive housing markets.
Requirements for a jumbo loan
Just like conventional loans, jumbo loan requirements may be different from lender to lender. Therefore, the following are just general guidelines for what you need to secure a jumbo loan.
Credit score
The general rule for jumbo loans is that you’ll need a credit score of 700 or higher.
Down payment
Jumbo loans usually mandate a substantial down payment, often around 20% or more, though requirements can vary depending on the lender.
Pros and cons of a jumbo loan
Pros
- Allows you to finance high-priced luxury homes
- Competitive interest rates, although they may be slightly higher than conventional loans
- Can offer flexible terms and interest rate options
Cons
- Stricter credit score requirements
- Larger down payment requirements
- Generally, higher interest rates compared to conventional loans
- May require more extensive documentation and a more rigorous approval process
Differences between jumbo and conventional loans
The main difference between a jumbo and a conventional loan will be the amount that each loan can finance. However, note the following differences between the loans.
Loan limits
The type of mortgage you choose for your financing is your final decision. However, if the loan amount you need for your desired property exceeds conforming limits, your only option may be a jumbo loan. If you don’t want a jumbo loan, you may need to adjust your home search so that you can find a property that fits within conventional limits.
2023 loan limits
The 2023 conventional loan limit set by Fannie Mae and Freddie Mac is $726,200 for most of the United States. This represents an increase of $79,000 from the 2022 limit of $647,200.
The limit for high-cost areas varies by geographic location. The Federal Housing Finance Agency (FHFA) publishes its annual conforming loan limits values that will apply to all conventional loans delivered to Fannie Mae and Freddie Mac.
Credit score requirements
Jumbo loans are almost always going to require a higher credit score, often 700 or above, whereas conventional loans may accept scores as low as 620.
Keep in mind that several factors will influence the credit score you need to secure a mortgage, like your DTI and financial history, the overall economic conditions, and the down payment amount you’re offering—just to name a few.
Down payment requirements
Conventional loans will often have more flexibility in down payment requirements, allowing for as little as 3% down. Jumbo loans usually mandate a substantial down payment of 20% or more. The more expensive your desired property is, the higher of a down payment you’ll likely need.
Interest rates
Interest rates for the average jumbo loan are likely to be slightly higher than those on conventional loans due to the larger loan amounts and increased risk for lenders.
Closing costs
Both loan types involve closing costs, but these costs can vary significantly based on the lender, location, and loan amount. Generally, a conventional loan will require 2-5% of the purchase price and a jumbo loan requires slightly more at 3-6%. An itemized breakdown of fees due at closing should be included in the closing disclosure from your lender.
Conclusion
Jumbo loans vs. conventional loans hinge on factors like your desired home’s price, your credit history, down payment capacity, and the level of flexibility you require.
Jumbo loans are ideal for those seeking to purchase high-end properties, offering competitive rates and financing options but with stricter requirements.
Conventional loans feature more relaxed credit score requirements and flexible down payment options and are suitable for a broader range of homebuyers. Ultimately, the best mortgage choice for you will depend on your unique circumstances and goals.
To make an informed decision, consult with a trusted mortgage expert at Homefinity, who can help you navigate the intricacies of jumbo vs. conventional loans, ensuring you secure the right financing for your dream home.
Photo by Alena Darmel
