Jumbo vs. conforming loans: understanding the differences

Published January 12, 2021
by Better

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What You’ll Learn

The difference between conforming and jumbo loans

Conforming loans vs. jumbo loans qualifying guidelines

How to determine if you’ll need a jumbo loan

If you’ve been home shopping in a higher-cost housing market, then you may have been presented with an option for a jumbo loan—even if the homes you’re looking at aren’t jumbo-sized. That’s because the “jumbo” in jumbo loans refers to the size of the loan, not the size of the property, and it’s something you may consider if you need to borrow more than the “conforming” loan limit in your area.

Let’s go through the differences between conforming loans and jumbo loans and the situations where each applies.

What is a conforming loan?

Conforming loans are loans that meet, or conform to, loan amount limits set by a government agency known as the Federal Housing and Finance Agency (FHFA). In addition, they must meet the lending guidelines set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). These guidelines are designed to protect lenders from lending to borrowers who, on paper, likely won’t be able to pay back their loans. They also protect borrowers from predatory lending tactics by ensuring they aren’t biting off more than they can chew. Home loans that meet these guidelines are lower risk for everyone involved. Less risk for lenders typically means qualifying guidelines are easier for borrowers to meet.

What is a jumbo loan?

Jumbo loans are designed for larger loan amounts that exceed conforming loan limits. Though you will have to meet certain qualifying standards to be approved for any loan, the specific financial requirements tend to be more rigorous for jumbo loans than conforming loans.

Jumbo loans are available for people borrowing more money than the conforming loan limit for their area. This may be due to a number of reasons, including purchasing a home with a higher price tag or in a high-cost area, or when refinancing an existing larger-balance mortgage. Because the high dollar amounts fall outside the limits of conforming loans, they are not eligible to be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac. From a lender’s point of view, that makes jumbo loans a riskier investment. It also makes them harder to sell as investments, and lenders may have to service these loans themselves—sometimes for the entire duration of the mortgage.

To offset this additional risk, lenders require more reassurance from borrowers that they will be able to pay back the loan. Simply put, this means jumbo loans come with stricter qualifying guidelines, like higher credit scores, larger down payments, more assets, and lower debt-to-income ratios, as well as higher interest rates.

Conforming vs. jumbo loan limits

Most mortgage lenders prefer to work with conforming loans because they are highly liquid, easy to package and sell to investors, and quickly free up more cash that can then be used to issue more loans. To reduce market volatility, lending limits are set by the federal government.

The Housing and Economic Recovery Act (HERA) requires an annual review of loan limits to ensure they reflect changes in the average U.S. home price. Since 2008, according to the FHFA, various legislative acts have increased the loan limits in certain high-cost areas in the United States.

As of January 2021, conforming loan amounts are capped at $548,250 for a single-unit home in most parts of the country. However, because the FHFA acknowledges prices can easily exceed this in higher-cost housing markets, like Hawaii, Washington D.C., San Francisco, or Los Angeles, maximum loan limits can reach as high as $822,375 in more expensive areas. But even in high-cost areas, it’s easy to exceed those limits, making jumbo loans a useful tool.

Qualifying guidelines for conforming and jumbo loans

Ultimately, it’s the size of the loan you’re looking to finance that will determine whether you’re looking at a jumbo loan or a conforming loan.

If your home loan amount is less than the specified conforming loan limit for your county, then you should qualify for a conforming loan as long as you meet the lending criteria.

However, if your home loan will exceed that loan limit, then you will require a jumbo loan and must meet jumbo loan qualifying criteria. Jumbo lenders set their own underwriting guidelines, so eligibility can vary from lender to lender, making it even more important to understand these rules.

While lenders have unique requirements for each loan type, here are the basic qualification standards for conforming and jumbo mortgages for 2021:

Chart Comparing Conforming Loan and a Jumbo Loan

Is a jumbo loan right for you?

If you’re a borrower with an excellent credit profile, significant money in savings, and a steady income, then qualifying for a jumbo loan could give you the flexibility you need to finance your dream home.

However, if you’re concerned about the qualification standards and higher interest rates of a jumbo loan, here’s how you can stay within conforming loan limits:

For a purchase:

Stick to a budget: Make sure you know the conforming loan amount for your county. Then, determine the maximum purchase price that will keep you within that limit.

Increase your down payment: Conforming limits don’t apply to purchase price; rather it’s the amount financed that needs to be considered. If you’re on the cusp of jumbo loan requirements, consider increasing your down payment.

For example, if you buy a home that costs $640,000 in an area where $548,250 is the conforming loan limit, and you have a down payment of $90,000, adding just $1,750 to your down payment would bring your loan to $548,250, meeting the conforming loan limit.

Example Cost Scenarios for a Jumbo Loan and a Conforming Loan

For a refinance:

Wait until you’ve paid off enough of your balance: If your existing mortgage is a jumbo loan, you can refinance to a conventional mortgage once your loan balance drops below the conforming loan threshold. Note: if you plan to roll any closing costs into your loan or tap into home equity, this will add to your mortgage balance.

The bottom line

Choosing between a conforming and a jumbo loan simply comes down to your financing needs.

Whether your loan will be big or small, if you’re ready to get started with the mortgage process, you can get pre-approved with Better Mortgage in as little as three minutes today.

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