What You Need to Know Before Applying for a Jumbo Loan or a Conventional Loan
If you are planning to buy a home, you may have heard of different types of mortgages, such as jumbo loans and conventional loans. But what are they, and how do they differ? And more importantly, which one is best for your situation?
In this blog post, we will explain the basics of jumbo loans and conventional loans, compare their pros and cons, and help you decide which one is right for you.
What is a jumbo loan?
A jumbo loan is a type of conventional loan that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA). These limits vary by location and property type, but for 2024, they are $766,550 in most areas, and up to $1,149,825 in high-cost areas.
A jumbo loan is also called a nonconforming loan, because it does not conform to the standards and requirements of Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy and guarantee most conventional loans in the secondary market.
Because jumbo loans are not backed by Fannie Mae or Freddie Mac, they are considered riskier and more expensive for lenders and borrowers. Lenders typically charge higher interest rates and fees for jumbo loans, and require stricter underwriting criteria, such as higher credit scores, lower debt-to-income ratios, larger down payments, and more cash reserves.
What is a conventional loan?
A conventional loan is a type of mortgage that is not insured or guaranteed by the federal government, such as FHA, VA, or USDA loans. Instead, it is originated, funded, and serviced by private lenders, such as banks, credit unions, or mortgage companies.
Most conventional loans are conforming loans, which means they meet the standards and requirements of Fannie Mae and Freddie Mac, and can be sold and guaranteed by them in the secondary market. This reduces the risk and cost for lenders and borrowers, and allows them to offer more competitive interest rates and terms.
However, some conventional loans are nonconforming loans, such as jumbo loans, which exceed the conforming loan limits, or subprime loans, which have lower credit standards and higher interest rates.
Pros and cons of jumbo loans
Jumbo loans have some advantages and disadvantages compared to conventional loans. Here are some of them:
Pros
- You can borrow more money to buy a more expensive or luxurious home, or a home in a competitive market
- You can avoid taking out multiple loans or piggyback loans to finance your home purchase
- You can choose from different types of jumbo loans, such as fixed-rate, adjustable-rate, interest-only, or balloon loans, depending on your preferences and goals
Cons
- You have to pay higher interest rates and fees, which can increase your monthly payments and total loan cost
- You have to meet stricter qualification criteria, such as higher credit scores, lower debt-to-income ratios, larger down payments, and more cash reserves
- You have less flexibility and protection, as jumbo loans are not standardized or regulated by Fannie Mae or Freddie Mac, and may have different terms and conditions depending on the lender
- You have more difficulty refinancing or selling your home, as jumbo loans have a smaller and more volatile market, and may be affected by economic fluctuations
Pros and cons of conventional loans
Conventional loans also have some advantages and disadvantages compared to jumbo loans. Here are some of them:
Pros
- You can pay lower interest rates and fees, which can reduce your monthly payments and total loan cost
- You can meet easier qualification criteria, such as lower credit scores, higher debt-to-income ratios, smaller down payments, and less cash reserves
- You can enjoy more flexibility and protection, as conventional loans are standardized and regulated by Fannie Mae and Freddie Mac, and have consistent terms and conditions across lenders
- You can have more options and opportunities to refinance or sell your home, as conventional loans have a larger and more stable market, and are less affected by economic fluctuations
Cons
- You can borrow less money to buy a less expensive or modest home, or a home in a less competitive market
- You may have to take out multiple loans or piggyback loans to finance your home purchase if you need more than the conforming loan limit
- You may have to pay for private mortgage insurance (PMI) if you put down less than 20% of the home price, which can add to your monthly payments and total loan cost
How to decide between a jumbo loan and a conventional loan
The decision between a jumbo loan and a conventional loan depends on several factors, such as:
- Your homebuying budget and needs: How much money do you need to buy the home you want, and how much can you afford to pay each month?
- Your financial qualifications and goals: How is your credit score, income, debt, savings, and investment portfolio, and what are your short-term and long-term financial objectives?
- Your personal preferences and risk tolerance: Do you prefer a fixed or variable interest rate, a shorter or longer loan term, a lower or higher monthly payment, and more or less certainty and security?
To help you decide, you can use online tools like Bing’s mortgage calculator to compare the costs and payments of different loan options, or consult with a mortgage professional who can advise you on the best loan for your situation.
Conclusion
Jumbo loans and conventional loans are both types of mortgages that can help you buy a home, but they have different features and benefits. Jumbo loans allow you to borrow more money, but they also have higher interest rates and stricter requirements. Conventional loans have lower interest rates and easier requirements, but they also have lower loan limits and may require mortgage insurance.
The choice between a jumbo loan and a conventional loan depends on your homebuying budget and needs, your financial qualifications and goals, your personal preferences and risk tolerance, and the availability and terms of the loans in your market.
Before you apply for a loan, you should do your research, compare your options, and consult with a mortgage professional who can guide you through the process and help you make the best decision for your situation.