Jumbo Loan vs. Conforming Loan: What’s the Difference?

Cardinal Financial December 23, 2020 | 6 min read
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Confused about which loan option is right for you? Here’s a simple breakdown to help you decide.

Shopping for a home loan is all about matching your personal financial risk tolerance with a product that’s right for you. Imagine you’re preparing for a swim in the ocean. If you’ve been swimming all your life, you’re more likely to explore out into deeper waters. If you don’t have quite so much swimming experience, you might opt to stay closer to shore. For many first-time homebuyers, it’s not just about which house to pick, but also which mortgage.

The process of purchasing a home and securing a mortgage might seem daunting at first, but the right lender will help break down each step so you can feel confident and comfortable all along the way.

Which is right for you? This comprehensive guide will help break down the similarities and differences between two common loan types—conforming vs. non-conforming loans, also known as jumbo loans—and help you make an informed decision.
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Conforming Loans 101

Conforming loans, like the name suggests, conform to the loan limits set by Fannie Mae or Freddie Mac, two agencies that oversee mortgage lending.

For a single-family home in most parts of the United States, the conforming loan limit is $548,250 in 2021. However, the limit is higher in places with competitive housing markets. Alaska and Hawaii also have a higher limit for 2021 ($822,375).

Conforming loans are the most popular option for borrowers looking to purchase or refinance a home. Borrowers may choose between fixed- and adjustable-rate mortgages with terms from 10 to 30 years.

These loans are not backed by government agencies like FHA, USDA, and VA loans, which are not considered conforming loans.

Jumbo Loans 101

But what if your ideal home is more expensive than what the conforming limit allows? That’s when you might opt for a jumbo loan.

Jumbo loans are larger mortgages often secured to finance luxury homes or homes in competitive markets (think Washington D.C., Los Angeles, or New York City). A jumbo loan is simply a mortgage for an amount that exceeds the conforming loan limits.

Jumbo loans are perfect for high-income earners looking to purchase more expensive properties, whether they be a primary residence, a second home, a vacation home or an investment property.

Jumbo mortgages aren’t backed by Fannie Mae, Freddie Mac, or any government agency, making them riskier for lenders.

While conforming loans can only take you so far when buying a home (up to $548,250 in most parts of the U.S. in 2021), a jumbo loan may be a strong option to help you borrow what you need for your dream house.

Breaking Down the Benefits

Prospective homebuyers should weigh the benefits of conforming and non-conforming loans.

Conforming loans are often easier to qualify for with lower interest rates, and allow for lower credit scores and smaller down payments.
Jumbo Loan

On the other hand, jumbo loans tend to be more difficult to secure because of their high limit. You’ll typically need an excellent credit score, a significant down payment, and a higher proof of income to qualify.

While these non-conforming loans typically have higher interest rates, the difference may not be significant from a conforming loan if the borrower is able to prove he/she has the capacity and cash reserves to pay back the loan easily. Some lenders appreciate that jumbo loan borrowers can be lower-risk and now offer more competitive interest rates.

How Do I Qualify For Conforming or Jumbo Loans?

Whether you’re looking to secure a conforming loan or a jumbo loan, there are several specific underwriting standards that are important to meet.

With both loans, lenders look at the same general topics, including your credit score, credit history, income, assets, and debt-to-income ratio.

For conforming loans, it’s a good rule of thumb to have:

1. A decent credit score

Depending on your down payment, a qualifying credit score could be anywhere from 620 to 700.

2. Reasonable debt-to-income ratio

Your debt-to-income ratio shouldn’t exceed 36-45 percent, depending on your down payment and loan type.

3. Some cash reserves

It may be necessary in some conforming loan cases that you have some cash available to prove you’re more likely to pay back your loan. Keep in mind: You may need to pay private mortgage insurance (PMI) payments if you’re unable to pay 20 percent of the loan amount as a down payment.

To qualify for a jumbo loan, you’ll typically need:

1. An excellent credit score

In many cases, it may be necessary to have at least a 680-700 credit score in order to secure a jumbo loan.

2. A larger down payment

While many homebuyers can secure conforming loans with a 3 to 10 percent down payment, jumbo loans typically require at least 10 percent or even up to 20 percent down. However, if you can avoid PMI payments, you’ll save money over the life of the loan.

3. Better financial stability

Jumbo loans tend to have higher interest rates over the rate of the loan. It may be a good practice to build up your credit and assets before applying for a jumbo loan. You may want to have six to 12 months’ worth of monthly payments saved to prove you have the resources and ability to pay back your loan.

Pro tip: Keep in mind that not all banks or lenders offer jumbo loans, so they may be more difficult to acquire. At Cardinal Financial, we’re currently offering jumbo loans for amounts between $548,250 and $1.5 million. Contact us to learn more!

Which Loan is Right For Me?

By and large, the right loan for you is the one you can comfortably afford to pay back.

Both conforming and non-conforming loans are designed to help homebuyers secure the home they want. So if you’re looking for a home that fits the conventional loan limits, a conforming loan will be right for you. And if you have your eye on a property that exceeds the limit in your area, a jumbo loan may be your best financing option.

Interested in learning which loan is right for you? Contact us now to learn more about how to navigate your home buying journey.


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