Jumbo Loans vs. Conventional Loans - What's the Difference?

When looking at mortgage options, you have probably come across the terms “Jumbo Loan” and “Conventional Loan”. But what exactly is the difference between these two products, and how do you know which one is right for you? In this article, we’ll dive into what exactly is a Jumbo Loan and when you might need one.

A conventional mortgage loan is the most common home loan utilized in the US. However, conventional loans are typically only available up to a certain dollar amount.

For 2022, the conventional loan limit is $647,200 in most locations (although it may vary slightly for a few specific locations within the US). This is expected to increase to $715,000 in 2023. This limit is set by the FHFA – Federal Housing Finance Agency – as the maximum amount that a borrower can finance through a conventional mortgage loan. If the buyer needs a mortgage loan above that amount – i.e. if they need to borrow greater than $647,200 – then the buyer will need to pursue a Jumbo Loan.

Unlike conventional loans, jumbo loans don’t have a pre-set standard limit. Each specific lender will have its own limits as to how big of a jumbo loan they are willing to fund.


Who can get a Jumbo loan?

Most jumbo loans will come with additional credit requirements and underwriting guidelines. For example, many lenders may require a credit score as high as 720 for jumbo loan applicants. 

The lender will also review a buyer's financials in greater detail and may require additional appraisals, greater cash flow, and a lower debt-to-income ratio. Additionally, the lender will likely also require a down payment of at least 20% for a jumbo loan vs. a conventional loan, which can be approved with a down payment as low as 5%.


Why the additional requirements?

Most conventional loans are ultimately purchased by two government entities – Fannie Mae and Freddie Mac. However, these institutions do not guarantee the purchase of jumbo loans.

Therefore, by approving a jumbo loan, the lender is taking a higher risk. If the loan ultimately defaults, the lender will be on the hook for a big financial loss with no real security to back up their investment.


While the requirements for a jumbo loan are more intense, it could still be the best option for certain homebuyers. If you are looking to purchase a property that is significantly more valuable than the average for your area, you may need to explore using a jumbo loan to finance your home purchase. 


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