Technically, a jumbo loan is a type of conventional loan — which is simply a mortgage that’s not backed by the government, but originated, financed and guaranteed entirely through a private lender. However, most folks thing of conventional loans as standard mortgages, and that a jumbo loan is not.
A jumbo loan is a kind of mortgage that allows a borrower to take out a large amount of cash and buy a home that is more expensive than the norm — or an amount that exceeds conforming loan limits, as they say in the home-financing biz.
Let’s look at this standard, and other ways jumbo loans differ from most conventional loans.
What is the difference between a jumbo and a conforming loan?
A conventional mortgage can be either conforming or nonconforming. The former is a mortgage that meets the requirements set by the Federal Housing Finance Agency (FHFA); the most common of these stipulate that the size of the loan be set at or below certain dollar limits. These limits vary from state to state, and even by counties within states. In 2023, the conforming loan limit is $726,200 in most areas, and up to $1,089,300 in higher-priced places.
When a mortgage is “conforming,” it is eligible for Fannie Mae and Freddie Mac to buy it on the secondary mortgage market. Knowing that these government-sponsored entities, major players in the mortgage industry, can purchase a mortgage greatly reduces a lender’s risk in offering it.
A jumbo loan doesn’t conform to the FHFA standards due its size, so it’s considered “nonconforming.” If you’re buying a more expensive home in your area, you’ll need a jumbo loan. This allows you to borrow the amount you need for the purchase, even though that amount is higher than the conforming loan size.
Many mortgage lenders offer jumbo loans up to $3 million or $5 million. You might be able to find jumbo loans in even higher amounts, especially if you work with a mortgage broker who specializes in them.
How to qualify for a conventional loan
While there are several qualifying factors that impact whether you can get a conventional loan, the most important is your credit score. Generally, you need a score of 620, at minimum, to qualify. The best mortgage rates, however, go to borrowers with scores of 740 or higher.
In addition to credit score, other qualifying factors for a conventional conforming loan include:
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At least a 3 percent or 5 percent down payment, depending on the lender and program.
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A 43 percent debt-to-income (DTI) ratio or lower. The max DTI is typically 36 percent but can range up to 50 percent in certain circumstances.