Two types of home loans you may consider when you are shopping for a home are conforming conventional loans, and jumbo loans. Not sure which to choose? This guide will go over the differences between these types of mortgages so you can figure out which may be suitable in your scenario.
What is a Conforming Loan?
A conforming loan is a type of conventional mortgage that fits within the Fannie Mae and Freddie Mac conforming loan limits. These limits are set by county every year.
What is a Jumbo Loan?
A jumbo loan is a type of mortgage that exceeds the conforming loan limits. That means they are not eligible for purchase by Fannie Mae or Freddie Mac. They are riskier for lenders since homebuyers will be borrowing a larger amount of money.
Jumbo loans are not just for first time homebuyers, nor are they only for purchasing mansion-sized homes. You may sometimes need a jumbo loan to buy a more modest property, or you might opt for one for other reasons.
Jumbo Loans vs. Conforming Loans: Qualifications
The criteria to qualify for a jumbo loan versus a conforming loan are pretty similar. But the requirements for jumbo loans are usually more rigorous.
- Down payment: Anywhere from 3 to 20% is typical for a conventional conforming loan. For a jumbo loan, it could be anywhere from around 10% to 30%.
- Credit score: The minimum score to apply for a conforming loan is 620. For a jumbo loan, it is 700.
- Debt-to-income (DTI) ratio: This requirement can vary for each type of mortgage. But generally speaking, a conforming loan will usually have a more relaxed DTI ratio requirement than a jumbo loan. But they can be comparable.
- Assets: When you apply for a conforming loan, you may be asked to show you have up to 6 months of ash reserves. If you apply for a jumbo loan, that requirement may bump up to 12 months.
- Insurance: If you put down under 20%, you will generally be expected to pay for private mortgage insurance, regardless of whether you are applying for a conforming or non-conforming loan. But jumbo loans may not always carry this requirement.
- Appraisals: You can buy a home with a conforming loan with one appraisal. If you are applying for a jumbo loan, however, there are scenarios where you might need to get two appraisals.
As you can see, the overall process of qualifying is much the same. But you will benefit from a stronger borrower profile if you need a jumbo loan.
Costs for Jumbo vs. Conforming Loans
One common assumption among homebuyers is that a jumbo loan has a higher interest rate than a conforming mortgage. This is not always true. In many situations, jumbo loans actually have lower interest rates than conforming mortgages.
And if getting a jumbo loan helps you to avoid PMI in a situation where you would need it for a conforming loan, that could also end up saving you significant money.
One thing to watch out for is closing costs, however. For jumbo loans, they can be higher. So, make sure you budget for that when you apply.
Summary
Let’s wrap it up by quickly reviewing what we learned:
- Conforming loans fit within the Fannie Mae and Freddie Mac conforming loan limits. Jumbo loans can be larger.
- Jumbo loans have more rigorous requirements than conforming loans on average, but sometimes they can be more comparable than you might expect. Homebuyers are often surprised by down payment requirements, for example.
- Jumbo mortgages are often more affordable than homebuyers expect them to be. Especially with very strong qualifications, you may qualify for a very competitive mortgage rate.
For these reasons, it is worth it to check whether a jumbo mortgage may be a good fit for your needs.
Apply for a Mortgage in California
Granite West Funding is based in Oakhurst. We can help you buy a home or refinance anywhere in California. To get started, please give us a call at (559) 540-2275 to schedule your mortgage consultation. We can help you apply for a jumbo loan, conforming loan, or other type of mortgage.
