In a Nutshell
A conforming loan is a mortgage that meets certain guidelines, including local limits for the mortgage amount. Loans above the conforming loan limit are called jumbo loans, and they may be helpful if you want to buy a more expensive home.If you’re considering buying a more expensive home, you’ll want to understand the difference between a conforming loan and a jumbo loan.
When you’re shopping for a home, you may have several different types of mortgage loans to choose from. One of the factors that may help you decide what type of mortgage you apply for is the price of your new home.
In typical cases, borrowers apply for conforming loans, meaning mortgages that fall within the loan limits established by the Federal Housing Finance Agency and guidelines set by government-sponsored entities Fannie Mae and Freddie Mac. But if the home you’re looking at is more expensive, then you may need a jumbo loan, which is a loan that’s larger than the FHFA limits. We’ll go over the key differences between conforming loans and jumbo loans and how to decide which loan type may be right for your situation.
- Conforming loan vs. jumbo loan — what’s the difference?
- Benefits of conforming vs. jumbo loans
- How to qualify for a conforming loan vs. a jumbo loan
- Should I get a conforming loan or a jumbo loan?
Conforming loan vs. jumbo loan — what’s the difference?
The basic difference between a conforming loan and a jumbo loan is the loan amount. Conforming loans are those at or below the county limits for the size of the loan. Jumbo loans exceed those limits. Conforming loans are typically less expensive, while jumbo loans can have added requirements like a bigger down payment because of the size of the mortgage.
Will jumbo loans cost more? Yes. So you should expect to pay more in interest charges for the larger loan. Jumbo loans may also feature higher interest rates and fees compared to a conventional mortgage.
The basics of a conforming loan
A conforming loan is one that meets the loan limits set each year by the Federal Housing Finance Agency, or FHFA. In 2022, the conforming loan limit on a single-unit home was set at $647,200 for most borrowers.
The FHFA also sets separate loan limits for regions with higher costs of living. This accounts for the fact that real estate in those areas can be significantly more expensive. In 2022, the limit for these high-cost areas is $970,800 for a one-unit home, or 150% of the ceiling for the rest of the country.
Government-backed mortgages such as Federal Housing Association loans (FHA loans) also set loan limits based on the FHFA limits. FHA loan limits are calculated as a percentage of the FHFA numbers.
Conforming loans must also meet certain guidelines set by Fannie Mae and Freddie Mac, the government-sponsored enterprises that guarantee most U.S. mortgages. These agencies set requirements for the down payment for the house, as well as the credit scores and debt-to-income ratio you need to borrow a conforming loan.
The basics of a jumbo loan
A jumbo loan is one that exceeds the loan limits set by the FHFA. Because Fannie Mae and Freddie Mac don’t purchase jumbo loans from lenders (reducing the lender’s risk), these loans tend to have stricter eligibility requirements. That means the guidelines for jumbo loan approval may vary by lender when it comes to loan limits, credit scores, down payment and DTI.
Historically, jumbo mortgage rates have been higher than those of conforming loans since they don’t have a government guarantee like conforming loans. Because Fannie Mae and Freddie Mac don’t purchase these loans, the lender takes on a bit more risk.
Benefits of conforming vs. jumbo loans
Benefits of a conforming loan
- Qualifying may be easier — One benefit of a conforming loan is that it may be easier to qualify for than a jumbo loan. When a bank underwrites a conforming loan, it can turn around and sell the loan to Fannie Mae and Freddie Mac — reducing risk for the bank.
- Banks take on less risk — Conforming loans are the most common loan type. Less risk for the lender may translate into more freedom to offer loans with lower qualifying requirements. According to 2020 data from the FHFA, roughly 96% of mortgages are considered conforming loans.
- Lower rates — Historically, conforming loans benefit from coming with lower interest rates than the typical jumbo mortgage rate, though this isn’t always the case (it depends on the lender).
Benefits of a jumbo loan
- Bigger loan — A jumbo loan allows you to borrow more money to purchase a more expensive home.
- More homes to choose from — With a jumbo loan (more to spend), your choices won’t be as limited as they are with a conforming loan.
- Better homes to choose from — If you can afford the higher monthly payments of a jumbo mortgage, your pricier home may very well come with better features and amenities than a less expensive home.
How to qualify for a conforming loan vs. a jumbo loan
Qualifying for a conforming loan
To qualify for a conforming loan, you’ll have to meet the eligibility guidelines set by Fannie Mae and Freddie Mac. For government-backed mortgages such as FHA loans, VA loans and USDA loans, you’ll also have to meet those guidelines.
In general, you’ll have to meet the following requirements:
- Credit scores — You must have a minimum credit score of 620 for conventional loans that meet Fannie and Freddie conventional (or conforming) loan guidelines. Government-backed mortgage programs such as FHA, VA and USDA loans requirements vary.
- Down payment — You must make a down payment between 3% and 5% for a single-family unit for a Fannie Mae or Freddie Mac mortgage. FHA and USDA requirements will vary depending on credit scores.
- Debt-to-income ratio — This number, known as your DTI, should typically not exceed 45%, though conventional Fannie Mae loans currently allow up to 50% when other factors can compensate for that additional leverage.
You may be subject to stricter requirements depending on your situation. For example, borrowers with a higher DTI or lower down payment may need higher credit scores to qualify.
Qualifying for a jumbo loan
In general, you’ll find that it’s more difficult to qualify for a jumbo loan, which makes sense given the larger amount of money you’re borrowing.
First, while the down payment on a conforming loan can be as low as 3% to 5%, some lenders require jumbo loan down payments of at least 10%, but possibly as high as 25% to 30%.
Lenders may also require higher credit scores for a jumbo loan. Lenders usually require solid credit to borrow a jumbo loan, with some requiring credit scores in the low to mid 700s or higher. Other requirements to qualify for a jumbo loan are similar to those for qualifying for any other loan. Your lender will consider your DTI, cash reserves, income history and other financial information.
Should I get a conforming loan or a jumbo loan?
Are you wondering whether a jumbo loan is right for you? As of 2020, jumbo loans made up just 3% to 4% of all loans originated. Conforming loans are more common, and generally more affordable.
But jumbo loans are an option to consider for certain homebuyers. You may need to think about applying for a jumbo loan if you’re looking at houses that exceed the conforming loan limit for your area.
Remember that when you’re considering a jumbo loan, you should ask yourself the same questions you would if you were considering any other type of home loan.
- Do I really need a jumbo loan, or would a more affordable house fit better in my budget?
- Can I comfortably afford the monthly payment on the loan?
- Will I meet the stricter borrowing requirements likely associated with a jumbo loan?
- Can I afford the larger down payment likely required with a jumbo loan?