If you’re planning to buy a higher-priced home, you may be looking to finance your purchase with a jumbo loan. And you’re probably also wondering about the difference between a jumbo and a conventional loan.
A jumbo loan is necessary to purchase a home where the loan amount is above the conforming loan limit values set by the Federal Housing Finance Agency (FHFA). Conforming loan limits change every year. For 2023, the limit for a single-unit property is $726,200 for most counties across the U.S. In high-cost areas, this amount increases to $1,089,300.
If you’re buying a home below this amount, you can finance with a traditional, conventional, conforming mortgage, or perhaps through one of several first-time home buyer programs. But if you need a mortgage that goes above the conforming loan limit, you’re going to be looking at a jumbo loan, so it’s time to get familiar with how to qualify and how the costs compare to other loans.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Recommended: The Cost of Living by State
What’s the Difference Between Jumbo and Conventional Loans?
Here’s a surprise: There isn’t really a difference between a jumbo and a conventional loan. Jumbo loans are conventional. “Conventional” simply means that a loan isn’t backed by a specific government agency such as the Federal Housing Administration (FHA), United States Department of Agriculture (USDA), or U.S. Department of Veterans Affairs (VA).
Many people get tangled up in the terminology. While jumbo loans are conventional, they are not “conforming.” Though the terms conventional and conforming are often used interchangeably (and mistakenly), a conforming loan is one that falls within the FHFA limits, meaning the lender can sell it to Fannie Mae and Freddie Mac to increase its liquidity. (Again, in 2023, the amount is $726,200 for most areas in the U.S., but can go up to $1,089,300 for high cost of living areas. If you’re wondering about your specific region, have a look at the conforming loan levels by state.)
💡 Quick Tip: One answer to rising house prices is a jumbo loan. Apply for a jumbo loan online with SoFi, and you could finance up to $2.5 million with as little as 10% down. Get preapproved and you’ll be prepared to compete in a hot market.
A jumbo loan exceeds these limits and is, thus, non-conforming. So when you’re comparing jumbo loans against other loans, you’re really comparing non-conforming loans against conforming loans. Other differences that affect borrowers are summarized in the table below:
| Conforming Loan | Jumbo Non-conforming Loan | |
|---|---|---|
| Loan amount | Below $726,200 for most areas, $1,089,300 for high-cost areas | Above $726,200 for most areas, above $1,089,300 for high-cost areas |
| Loan type | Fixed or variable rate | Fixed or variable rate |
| Down payment | Can be as low as 3% | Usually 10% or more |
| Credit score | 660+ | 700+ |
| Income requirements | Lower income requirements | Higher income requirements. For example, a payment on a $726,200 mortgage at 6.7% interest would be $4,969. In order for your payment to not exceed 28% of your monthly income (the margin of safety, you would need to make $17,746 per month or $212,952 per year. |
| Cash reserves or assets | Not required | 6 to 12 months may be needed |
| How the loan is backed | Backed by Fannie Mae and Freddie Mac | Not backed by Fannie Mae or Freddie Mac |
How to Qualify for a Jumbo Loan
Requirements for jumbo loans are more stringent than those for other types of loans. Because these types of mortgages can’t be sold to Fannie Mae or Freddie Mac, the lender takes on more risk should the borrower default.
These requirements include:
• Debt-to-income (DTI) ratio. You need plenty of income to qualify for a jumbo loan. Qualified mortgages require a DTI of 43% or lower.
• High credit score. Lenders want to be sure you’ll repay the loan, especially since it’s a much larger amount. A credit score of 700 or above is recommended.
• Assets. Lenders look for cash that can be used to pay the mortgage. To be safe, you may want to put aside enough money to cover the mortgage for 6 to 12 months.
What to Know About Jumbo Loan Mortgage Rates
Prospective jumbo loan borrowers often wonder, “Are jumbo loan rates higher than other loans?” Jumbo conventional loans don’t automatically have higher interest rates and can be competitive with conforming conventional loan interest rates. They fluctuate with market conditions. Sometimes, they’re even lower than conventional loan interest rates.
You may be able to check your jumbo loan rate with your lender before submitting a full application.
Jumbo Loan Closing Costs
With a larger loan amount, you can also expect jumbo loan closing costs to be higher. While many closing costs are fixed, there are others that are larger due to percentage-based compensation closing costs.
Should I Choose a Jumbo Mortgage?
If you have the option to choose between a jumbo loan vs. a conforming loan, (such as when you have enough money to reduce the principal loan amount so that it qualifies as a conforming loan), you’ll want to ask yourself if it’s worth it to put down the extra money to qualify for a conforming conventional loan. There are some specific scenarios where a jumbo loan vs. a conforming loan makes sense.
💡 Quick Tip: To see a house in person, particularly in a tight or expensive market, you may need to show the real estate agent proof that you’re preapproved for a mortgage. SoFi’s online application makes the process simple.
When to Choose a Jumbo Mortgage
Borrowers who should consider jumbo mortgages:
• If you’re looking for a luxury home
• If you’re buying a vacation home
• If you live in a high-cost area
• If you have a great credit score
• If you have a strong DTI ratio
• If you have plenty of income
When to Choose a Conventional Mortgage
Borrowers who should consider conventional mortgages:
• If you have moderate income
• If you’re looking for a moderately priced home
• If the mortgage amount is below the conforming loan limits
• If you need a down payment lower than 10%
• If your cash reserves after your down payment will be limited
If you’re close to the conforming loan limits, you may also want to consider a piggyback mortgage. If you’re able to obtain a piggyback loan, you may be able to buy your home with a conventional, conforming mortgage instead of a jumbo loan.
How it works: A piggyback loan allows you to take a second loan to “piggyback” off the first mortgage with the purpose of lending you enough money to avoid a jumbo mortgage or the PMI that comes with a down payment less than 20%. It’s essentially a second mortgage, and you’ll be making a second payment to cover it.
The Takeaway
When it comes to whether or not to choose a jumbo loan, the decision may be made for you based on the price of the home you want to buy. Mortgages above the conforming loan limit need jumbo loan financing. If you want a conforming, conventional loan, you’ll need to get a mortgage below $726,200 for most areas in the U.S. and $1,089,300 for high cost of living areas.
When you’re ready to take the next step, consider what SoFi Home Loans have to offer. Jumbo loans are offered with competitive interest rates, no private mortgage insurance, and down payments as low as 10%.
FAQ
Are jumbo rates higher than a conventional mortgage?
Jumbo rates fluctuate with market conditions. They may be on par with rates of loans that fall within the limits for conforming loans set by the Federal Housing Finance Agency (so-called conforming loans). Sometimes, they’re even lower.
What is the downside of a jumbo mortgage?
Possible downsides of a jumbo mortgage include requirements for a higher down payment, higher credit score, more cash reserves, and a higher monthly payment because of the higher home price.
Do jumbo loans have PMI?
Private mortgage insurance is not always required on jumbo loans. Whether or not PMI is needed will depend on your lender and the size of your down payment.
Photo credit: iStock/courtneyk
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