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Jumbo vs. conventional loans

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Residential neighborhood
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Borrowers can choose from two types of conventional mortgages: conforming and nonconforming. A jumbo loan is a kind of nonconforming loan that allows a borrower to take out a mortgage for an amount that exceeds conforming loan limits. In many housing markets in 2022, that means more than $647,200.

Who should use a jumbo loan?

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. When a mortgage is “conforming,” it adheres to criteria set by Fannie Mae and Freddie Mac that allows those entities to buy the loan on the secondary mortgage market. A jumbo loan doesn’t conform to these standards due its size, so it’s considered “nonconforming.” In 2022, the conforming loan limit is $647,200 in most areas, and up to $970,800 in higher-priced places.

Many mortgage lenders offer jumbo loans up to $1 million, and some up to $2 million, $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 loan include:

  • At least a 3 percent or 5 percent down payment, depending on lender and program
  • A 43 percent debt-to-income (DTI) ratio or lower

How to qualify for jumbo loan

To be eligible for a jumbo loan, many mortgage lenders look for a credit score of 700 or higher, although some go as low as 660 or 680. You’ll also need to be able to provide at least 10 percent for a down payment — often more — and have a higher income and low or no debt.

Unlike conventional loans, you’ll likely also need at least six months’ to 12 months’ worth of reserves. This shows the lender you have enough assets (such as savings) 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 were buying a home for $738,200 and your closing costs were 2 percent, you’d pay $14,764 at closing. If your home were $300,000 less and closing costs the same, you’d pay $8,764.

Conventional vs. jumbo loan rates

Today, many jumbo loan rates are actually lower than those on some conventional loan offers. Currently, the average 30-year fixed conventional conforming rate is 6.850%, while the average 30-year fixed nonconforming rate is 6.810%, according to Bankrate’s national survey of large lenders.

How to decide which 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 conventional or jumbo loan makes more sense.

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