By Bill Lyons | Published on March 28, 2023
TABLE OF CONTENTS

    When buying a home, you have many options to choose from. Most people don’t know how many mortgage programs can help them save money and get the funding they need to purchase a property. However, since several types of home loans are available, it can be difficult to find the right one for you. 

    Conventional loans are the most common type of home loan, but they have limits; a loan amount cannot exceed that limit, which is $766,550 in most US states. 

    Individuals looking to purchase high-value properties will have to find another type of loan to secure the funding they need. A jumbo loan might be the right solution when you need an amount larger than the conforming loan limits. 

    With either type of loan, borrowers can purchase homes and other properties if they meet certain eligibility requirements, including credit scores, income thresholds, ability to repay, and down payments. In addition, both types of mortgages are issued by private lenders, but there are many key differences between the two. For example, jumbo loans are used for purchasing more expensive properties, while conventional mortgages are ideal for the average homebuyer. 

    Let’s compare jumbo vs. conventional loans and dig deeper into each type to help you make the right decision. 

    What Is a Jumbo Loan?

    To understand jumbo loans vs. conventional loans, you should know the definition of each. A jumbo loan is a mortgage that allows borrowers to purchase high-priced properties above the conforming threshold of $766,550 for traditional loans. 

    There are subtypes of jumbo loans, such as near-miss jumbo loans, but the intended use is the same. Jumbo loans are often the best loans for luxury homes and those in competitive markets because they’re non-conforming and don’t have the same restrictions as conventional loans. 

    However, to qualify for a jumbo loan, borrowers must demonstrate their ability to repay the loan, which typically means being a part of a higher income bracket and having excellent credit. Therefore, they’re not ideal home loans for bad credit. 

    Jumbo Loan Requirements

    Jumbo loans are issued by private lenders and are not backed by federal agencies. These non-conforming loans require lenders to take on more risk by offering them to eligible borrowers, so there may be strict requirements depending on the type of loan and lender. 

    In most cases, you’ll need to have the following:

    • Proof of income: Borrowers should have at least two years worth of tax returns or payment documents to prove that they have a reliable source of income and savings to cover several months of mortgage payments. 
    • Credit scores: Lenders prefer higher credit scores, giving borrowers lower interest rates. Typically, lenders like to see a credit score of 700 for jumbo loans, but the requirement varies by lender. For example, Griffin Funding’s jumbo loans allow for credit scores as low as 620, depending on the borrower’s down payment. 
    • DTI ratio: Debt-to-income ratio is a borrower’s monthly debt compared to their monthly income, and most lenders require a 43% or lower DTI to qualify for a jumbo loan. 
    • Down payment: All lenders require a minimum down payment for jumbo loans of at least 20%, but this requirement varies by lender. For example, Griffin Funding’s near-miss jumbo loans allow borrowers to qualify with as little as 10% down. 

    What Is a Conventional Loan?

    A conventional mortgage loan is not backed by the federal government and is offered by private lenders. Conventional mortgages are conforming, so they have strict loan limits set by the Federal Housing Finance Agency (FHFA) and meet down payment and income requirements set by Freddie Mac and Fannie Mae. In addition, conventional loans have stringent requirements, including minimum credit scores and down payments.

    You can use conventional home loans to purchase or refinance homes under loan limits. Still, they can be difficult to qualify for even though they offer flexible terms and fewer restrictions than other types of loans. 

    There are two types of conventional loans: fixed and adjustable-rate mortgages. Fixed-rate mortgages have an interest rate that does not change. Adjustable-rate mortgages (ARMs) have a variable interest rate that changes based on market conditions. 

    Conventional Loan Requirements

    When comparing conventional vs. jumbo loans, you’ll notice the requirements are quite different. Conventional loans have more stringent requirements, and the borrower’s home purchase must not exceed the loan limits to qualify. 

    Typical conventional loan requirements set by Fannie Mae, Freddie Mac, and the lender include the following: 

    • Proof of income: Lenders must determine whether a borrower can afford the loan based on their income. Borrowers can prove their income with tax returns, pay stubs, and other types of documentation. 
    • Credit scores: Again, higher credit scores mean lower interest rates, but you can qualify for a home loan with a credit score as low as 620 with a conventional loan. 
    • DTI ratio: Borrowers must have a DTI below 43% to qualify for a conventional loan. 
    • Down payment: Down payment amounts vary depending on the loan provider. However, you should expect to put at least 3-5% down on a home with better rates for borrowers who put 20% down. 
    • Loan size limits: Conventional loans are conforming loans, so you must fall within the limits set by Fannie Mae and Freddie Mac. The home loan value cannot exceed $766,550 in most states. However, there are some exceptions in high-cost areas. For example, in Orange County, CA, the high cost limit is $1,149,825.

    It’s important to note that while you can put less than 20% down on a conventional home loan, you must pay for private mortgage insurance (PMI) as part of your monthly mortgage payment to protect your lender if you default on the loan. This increases the amount you’ll pay monthly, so it’s usually best to put 20% down on a home when using a conventional loan. 

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    Jumbo Loans vs. Conventional Loans

    Now that you understand what each type of loan is and what they’re used for, let’s discuss some key differences between jumbo and conventional home loans. 

    Loan amounts

    Jumbo loans are for high-value properties over the loan limits set by Fannie Mae and Freddie Mac. If the loan amount falls below the limit, a conventional loan is typically easier to obtain and has less stringent requirements. 

    Down payments

    Most jumbo loans require a larger down payment of at least 20% down. The more you put down on a home loan, the lower your interest rates will be, no matter the type of loan. 

    Still, conventional loans allow you to put down much less, typically 3-5%. 

    Credit scores

    Jumbo loans typically require a good or better credit score of 700 or above, while conventional loans allow borrowers with credit scores as low as 620 to qualify. 

    DTI ratios

    DTI ratio requirements vary by lender, but jumbo loan lenders typically require a DTIR of 43% or lower, while traditional home loans may allow up to a 55% DTIR. 

    Cash reserves

    Lenders want borrowers to have savings or liquid assets that can cover several months or mortgage payments for jumbo loans to prevent defaults.

    In contrast, conventional loans may not require reserves depending on your DTI and credit score. 

    Loan-to-value ratio

    The loan-to-value ratio compares the mortgage with the appraised property value, so the higher your down payment, the lower the LTV. 

    Jumbo loans have stricter LTV requirements than conventional loans. 

    Eligible properties

    You can use jumbo and conventional loans to purchase the same types of properties, including primary residences, vacation homes, secondary homes, and investment properties. However, you should only use jumbo loans for high-value properties since they typically have higher interest rates. 

    Jumbo loans allow you to borrow more money and qualify for competitive interest rates, but you need a higher credit score and income to qualify, and minimum down payments are typically at least 20% of the home’s value. In addition, you may be required to have up to 12 months’ worth of reserves. As a result, jumbo loans are ideal for financing large luxury properties or homes in high-cost areas. 

    Meanwhile, conventional loans have less stringent lending criteria and allow borrowers to qualify with lower credit scores and minimum down payments of as low as 3%. Conventional loans do have limits, and down payments below 20% require borrowers to purchase PMI, which increases their monthly mortgage payments. 

    Apply For The Loan You Need With Griffin Funding

    Jumbo loans and conventional loans are both used to finance home purchases. However, the most significant difference is that jumbo loans are non-conforming and don’t have limits for how much you can borrow, making them ideal for high-net-worth individuals with excellent credit scores and large down payments. That said, if your loan amount is under the conforming limits set by Fannie Mae and Freddie Mac, jumbo loans aren’t necessary, and a conventional loan is easier to obtain for most borrowers. 

    Either jumbo loans or conventional loans could help you secure your dream home. Wondering which is right for you? Talk to one of Griffin Funding’s mortgage specialists to help you determine which loan is right for you. Use our online form to request a quote, or call us to speak one-on-one with a specialist to learn more about our mortgage programs. 

    Bill Lyons

    Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.