Borrowers utilize two kinds of mortgages to buy homes, namely jumbo and standard mortgages. Both require buyers to fulfill specific qualifying criteria which often concern minimum credit scores, income limits, repayment capacity, and down payment amounts.
While both jumbo and conventional mortgages are used to guarantee property, they are fundamentally different. The former allow you to purchase property with high selling prices, typically in the millions of dollars. The latter, however, is more tailored to the requirements of the typical purchaser and may be either conforming or non-conforming.
Key Differences of Jumbo and Conventional Mortgages
To help you fully understand jumbo and conventional mortgages, here are some critical differences between the two:
Jumbo Mortgages
As opposed to conventional mortgages, jumbo mortgages are loans used to fund the acquisition of luxury real estate and are non-conforming. These loans are intended for high-priced property investment and are often used to finance upscale houses and those in highly competitive housing markets.
Jumbo mortgages are not subject to Federal Housing Finance Agency (FHFA) lending limitations and are not guaranteed by Fannie Mae or Freddie Mac. Despite this, many people still adhere to the regulations for qualified home mortgages.
Many jumbo mortgages surpass the respective jurisdictions’ maximum conforming loan limit. Other characteristics that may prevent it from being conforming to loans include well-off borrowers with exceptional needs. It also serves interest-only mortgages that culminate in balloon payments after the loan period, when the entire borrowed amount is payable at the end of the loan term.
To qualify for a jumbo loan, borrowers essentially need to:
- Have a high credit rating
- Be in a higher income bracket
- Possess low debt-to-income (DTI) ratios
Historically, jumbo loan interest rates were considerably higher than conventional mortgage rates. Although the margin has been narrowing, they are still somewhat higher. Down payment conditions were also structured similarly, climbing as high as 30% at one time. However, jumbo loans demanding a down payment of 10% to 15% are becoming increasingly prevalent.
Jumbo mortgages usually come with higher interest rates and greater down payments in order to balance the higher degree of risk associated with these products.
Conventional Mortgages
Conventional mortgages are loans made available by private lenders such as banks and other financial organizations like credit unions and mortgage organizations. Borrowers must make a down payment, have a minimum credit score, be of a particular income level, and possess a reasonable DTI ratio.
One major difference between conventional and jumbo mortgages is that the former can be conforming or non-conforming. The FHFA establishes the limitations for conforming loans. Moreover, Fannie Mae and Freddie Mac also determine the payment terms for these loans. However, not all home mortgages follow these standards, and those that do are classified as traditional non-conforming mortgages. Because the government does not guarantee them, eligibility and conditions are left up to the lenders, making them more challenging to qualify for than conforming mortgages. Another advantage is that they are often less expensive.
Special Considerations
Fannie Mae and Freddie Mac usually buy, process, and distribute almost any mortgage as long as it meets their conforming lending criteria. These standards consider a borrower’s credit score and history, debt-to-income (DTI) ratio, loan-to-value (LTV) ratio, and one additional important factor like the loan amount.
On the other hand, jumbo loans are not guaranteed by government agencies. Lenders take on more significant risks when they make them available. If you want to get one, you’ll have to meet more rigorous credit requirements:
- Proof of Income: Bring two years’ worth of tax documents or comparable paperwork to demonstrate that you have a regular and dependable source of revenue. Financial institutions will also want to verify that you have sufficient liquid assets to cover at least six months of loan repayments.
- Credit score and history: A credit score of at least 580 is usually required before a lender decides you qualify for a conventional mortgage. Jumbo loans often require scores upwards of 670.
- Debt-to-Income ratio (DTI): To qualify for a standard mortgage, your debt-to-income balance (your monthly debt commitments divided by your monthly income) should be 43 percent or less. Because jumbo mortgages are considerably larger, lenders will usually seek an even lower DTI.
Final Thoughts
Obtaining a mortgage these days is needlessly tricky and fraught with possible stumbling blocks. Moreover, jumbo mortgages are much more beneficial to a bank seeking customers to cross-sell other financial products such as private wealth services. However, it will come down to your preference or what you need. If you can afford a high-value house, you should probably get a jumbo mortgage; on the other hand, if you want to buy a low-priced property, you should likely get a conforming mortgage instead.
When you work with NetLending Home Loans, you will not be compelled to participate in a home mortgage program that is not a suitable match for you. Call us today to assist you in finding the right house and loan for you!
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