What Is The Difference Between A Conventional Loan And A Jumbo Loan?

Sometimes the most beautiful houses can be a little out of your budget. But you’ve got your eyes on the beautiful garden, the lovely patio, spacious bedrooms and of course, an ideal location. Buying a home is a one-time investment, and if you’re spending money, you don’t just want a house, you want a home.

So why should you compromise on your dream house? If money is an issue, your mortgage company has other options to support you.

What is considered a Jumbo Loan?

In simple words, a jumbo loan is a bigger loan than what you were already getting to finance for luxury homes. This home loan exceeds the maximum limit of conforming loans in the US, and well, good for you, because the more the merrier!

Not only for a house, but any property that may be too expensive for a conventional loan is covered in a jumbo mortgage. Jumbo loans are relatively expensive as well because they aren’t backed by Fannie Mae and Freddie Mac (two government-sponsored mortgage companies).

Jumbo Loan Requirements

Of course, since the jumbo loan is a big amount being given to you on a loan, the criteria is obviously very tough. Not everyone qualifies for a jumbo loan, but here are the factors that are considered while loans are given.

• High credit score: You need to have a commendable credit score to be able to qualify for a jumbo mortgage. In some situations a score of at least 700 is required, and in some as high as 720 will make you eligible.
• Cash reserves: You need to have a good amount of cash already in the bank that shows that you will be able to pay back one year worth of mortgage payment. In most circumstances your mortgage lender will ask for bank documents where you can prove your cash reserves.
• Insurance history: This is a relatively minor factor but mortgage companies tip the scale in your favour if you have a good insurance payback record. This will include timely payment of your other insurance policies (health, auto etc) and that none of them have lapsed due to halt in payment.
• Down payment: There is a specific amount of downpayment that you’re required to make, but fortunately these have eased out in the past years. Some time ago, the down payment percentage was about 30% but now it has decreased up to 20%. This has caused a lot of people to be approved for jumbo loans in recent years.
• Debt-to-income ratio: A DTI ratio is the amount of debt you have which is paid from your monthly income. The lower the ratio, more chances of you getting approved for a jumbo loan.

These loans can be calculated by using online jumbo loan calculators to compare prices and the best plans. They will ask for figures that you owe, how much downpayment you can make and a couple other questions before they give you an amount.

What is a Conventional Loan?

A conventional loan is a standard type of loan that is issued by private mortgage companies, banks or credit unions to people looking to buy a home. These are however backed by Fannie Mae and Freddie Mac, but not the government itself.

The rate of interest in conventional mortgage loans remains the same throughout; meaning the interest rate doesn’t change with time.

Even though these loans are generally less than jumbo loans and are aimed at giving them out to the general public, there is still an eligibility criteria that must be met.

Conventional Loan Requirements

Since these loans aren’t backed by the government, the risk is also more. This is why the requirement criteria isn’t as smooth. Here is what you need to consider to be eligible.

• Credit score: As opposed to a jumbo loan, a conventional loan requires the credit score to be 600+.
• Downpayment: This could be as low as 3% depending upon the mortgage company, and a maximum of 20%.
• Conforming or non-conforming: These conforming loan limits are set by the Federal Housing Finance Agency (FHFA). The 2020 loan limit on conforming loans is $510,400 in most areas and $765,600 in high-cost areas. Non conforming loans limits are set by the mortgage company of up to $1 million or $2 million in the case of jumbo loans.

What is a Conventional Rehab Loan?

A conventional rehab loan- also known as renovation loan is given to cover not only the value of property but also the cost of refinancing it. So under a single mortgage, the loan covers any renovation needed.

Conventional Loan Rates

Here are the rates for conventional loans given out by mortgage companies.

Products	Rate*	APR*
Conventional 15 Year Fixed	2.250 %	2.430 %
Conventional 20 Year Fixed	2.875 %	3.034 %
Conventional 30 Year Fixed	2.875 %	2.996 %

Conclusion

A conventional loan and jumbo loan both have their own share of requirements, but how do you decide which one works best for you? It solely depends on the type of property you’re interested in. If the property requires a loan that isn’t covered under a conventional loan, opting for a jumbo loan may be your only option.

The best way to figure out is having an agent advise you on how to go about it, of course, whatever you do, make sure you’re able to pay off the loan in due time as well.