Jumbo vs conventional loans: What’s the difference?

Technically, a jumbo loan is a type of conventional loan — which is simply a mortgage that’s not backed by the government, but originated, financed and guaranteed entirely through a private lender. However, most folks thing of conventional loans as standard mortgages, and that a jumbo loan is not.

A jumbo loan is a kind of mortgage that allows a borrower to take out a large amount of cash  and buy a home that is more expensive than the norm — or an amount that exceeds conforming loan limits, as they say in the home-financing biz.

Let’s look at this standard, and other ways jumbo loans differ from most conventional loans.

What is the difference between a jumbo and a conforming loan?

A conventional mortgage can be either conforming or nonconforming. The former is a mortgage that meets the requirements set by the Federal Housing Finance Agency (FHFA); the most common of these stipulate that the size of the loan be set at or below certain dollar limits. These limits vary from state to state, and even by counties within states. In 2023, the conforming loan limit is $726,200 in most areas, and up to $1,089,300 in higher-priced places.

A jumbo loan doesn’t conform to the FHFA standards due its size, so it’s considered “nonconforming.” If you’re buying a more expensive home in your area, you’ll need a jumbo loan. This allows you to borrow the amount you need for the purchase, even though that amount is higher than the conforming loan size.

Many mortgage lenders offer jumbo loans up to $3 million or $5 million. You might be able to find jumbo loans in even higher amounts, especially if you work with a mortgage broker who specializes in them.

How to qualify for a conventional loan

While there are several qualifying factors that impact whether you can get a conventional loan, the most important is your credit score. Generally, you need a score of 620, at minimum, to qualify. The best mortgage rates, however, go to borrowers with scores of 740 or higher.

In addition to credit score, other qualifying factors for a conventional conforming loan include:

• At least a 3 percent or 5 percent down payment, depending on the lender and program.
• A 43 percent debt-to-income (DTI) ratio or lower. The max DTI is typically 36 percent but can range up to 50 percent in certain circumstances.

How to qualify for a jumbo loan

While qualifying for a jumbo mortgage is similar to a conforming loan, there are some differences, including:

• Down payment:  You usually need to be able to provide at least 20 percent for a down payment, and maybe as much as 25 percent.
• Credit score: Many mortgage lenders look for a credit score of 700 or higher, although some go as low as 660 or 680.
• Income: You will most likely need to have a higher income to qualify for a jumbo loan since the loan amount is larger.
• Cash reserves:  You’ll likely also need at least six months’ to 12 months’ worth of reserves. This shows the lender you have enough assets — liquid assets — to make as much as a year’s worth of jumbo mortgage payments.

Conventional vs jumbo loan closing costs

Both conventional loans and jumbo loans have closing costs, which typically run 2 percent to 5 percent of the home’s purchase price. While the percentage won’t differ much between the two, with a jumbo loan, you’re buying a more expensive home, so you’ll pay more in closing costs.

For example, if you borrow $850,000 and your closing costs are 5 percent, you’d pay $42,500 at closing. However, if your loan is $300,000, you’d pay $15,000.

Jumbo vs conventional mortgage rates

Many jumbo loan rates may actually be lower than those on some conventional loan offers since lenders still want to remain competitive. Otherwise, jumbos tend to be influenced by the factors that move mortgage rates and interest rates in general, such as the benchmark federal funds rate the Federal Reserve sets.  The particular interest rate you’ll get, of course, depends on your credit score, income, down payment, assets and current debt load.

How to decide which loan is right for you

The decision to get a jumbo loan often comes down to necessity: If you’re buying in a pricey market, you’ll need a bigger mortgage. Both conventional and jumbo loans require good to excellent credit scores, but jumbo loans have extra qualifying factors like a higher income, lower DTI ratio and more reserves.

Ultimately, your homebuying budget determines whether a traditional conventional or a jumbo loan makes more sense. (One workaround, if you decide against the jumbo, is to take out a conforming loan and then a smaller piggyback loan, which will collectively finance the home purchase.)  To ensure you find the best loan for your needs, it’s important to find a mortgage lender that offers jumbo loans, since it is a more unique type of mortgage.