There are two main 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 2023, that means more than $726,200.

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 2023, the conforming loan limit is $726,200 in most areas, and up to $1,089,300 in higher-priced places.

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 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. The max DTI is typically 36 percent but can range up to 50 percent in certain circumstances.

How to qualify for a 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, even as much as 25 percent — 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 borrow $600,000 and your closing costs are 2 percent, you’d pay $12,000 at closing. If your loan is $300,000 and closing costs are the same percentage, you’d pay $6,000.

Conventional vs. jumbo loan rates

Today, many jumbo loan rates are actually lower than those on some conventional loan offers. The interest rate you’ll get depends on your credit score, income, down payment, assets and current debt load.

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.

Correction, Feb. 10, 2023 2:42 pm ET: A previous version of this article stated that borrowers needed a DTI of 43 percent or lower to qualify for a conventional loan. While this is a good rule of thumb, we’ve updated the article to add that the max DTI is typically 36 percent, but can range up to 50 percent in certain circumstances. We’ve also updated the article to clarify that closing costs are a percentage of a borrower’s loan amount, not necessarily the total price of the home.