When your borrowers are beginning the hunt for their dream home, it’s easy for them to overlook some of the financial aspects. With a plethora of loan options available – such as Jumbo and Conventional loans which differ in terms of requirements – you’ll want to assist them in knowing what is best suited for them before signing on any dotted lines.
So, let’s clear up one big misconception first: all non-government-backed loans are not created equal! We will explore both types by looking at their individual stipulations and providing answers to frequently asked questions. Therefore, when it comes time to choose between them, there won’t be any uncertainty about making the right decision for getting into your future abode without breaking the budget or sacrificing quality.
What Are Jumbo and Conventional Loans?
If your borrowers are in the market for a big, luxurious abode or looking to buy in an area with stiff competition, then they may require something more substantial than ordinary home financing: enter Jumbo loans. An excellent choice when conventional mortgage amounts fall short of your needs; these generous and non-conforming options provide access to extended borrowing power so no dream is out of reach!
Conventional mortgages are loans that are not backed by the government, but most meet the standards set by Fannie Mae and Freddie Mac.
Maximum amounts Fannie Mae and Freddie Mac will purchase or insure for mortgages. Fannie Mae and Freddie Mac help reduce interest rates for consumers by buying mortgages from lenders, packaging them into mortgage-backed securities, and selling them to investors on the secondary mortgage market.
The current loan limits set by Fannie and Freddie are:
| Units |
Conforming |
High-Balance |
| 1 |
$726,200 |
$1,089,300 |
| 2 |
$929,850 |
$1,394,775 |
| 3 |
$1,123,900 |
$1,685,850 |
| 4 |
$1,396,800 |
$2,095,200 |
When it comes to borrowing money for a home purchase, the differences between Jumbo and conforming mortgages can be difficult to navigate. But knowing some key vocabulary words can help make these loan options more approachable!
Down payments are an important factor: how much your borrower puts down as their initial payment when obtaining a loan.
Also critical is their credit score – this three-digit number indicates whether lenders have confidence in repayment ability.
Debt-to-income ratio (DTI) shows how much of the monthly income goes towards paying off existing debts versus what remains available after those obligations are taken care of – understanding DTI is essential in making informed decisions about potential loans!
Having a healthy cash reserve is essential for making sure your client can pay their loan back without fail.
Similarly, lenders will gauge the worth of a home in comparison to how much money they are willing to lend using something called an LTV ratio – giving insight into whether lending out this amount would be feasible and wise.
| Requirement |
Jumbo Loan |
Conventional Loan |
| Property Type |
Luxury home or property located in highly competitive area |
Primary home, second home, investment properties |
| Loan Limit |
None |
$726,200 in most counties |
| Minimum down payment |
At least 10%; some lenders may require up to 30% |
As low as 3% |
| Minimum credit score |
Most lenders require 700, A&D starts at 660 |
620 |
| Mortgage insurance |
None |
Required if down payment is less than 20% |
| Debt-to-income ratio |
As low as 36%, A&D as high as 45% |
Maximum 45 – 50% |
| Cash reserves |
6 to 12 months’ worth of monthly payments available |
No set requirement |
Lender, loan amount, property location, and financial situation may affect borrower’s needs.
Advantages of Jumbo Mortgages
The main advantage of a Jumbo mortgage is that they often come with lower interest rates than Conventional loans because lenders are less exposed to risk since they don’t have to meet certain requirements set by Fannie Mae or Freddie Mac. Additionally, borrowers can qualify for larger loan amounts with Jumbo mortgages, which means they can purchase more expensive homes without having to come up with additional cash for down payments or closing costs.
Disadvantages of Jumbo Mortgages
The primary disadvantage of Jumbo mortgages is that they often require larger down payments compared to Conventional mortgages—usually 20% or more of the purchase price—which can be difficult for some buyers who have limited funds available. Additionally, since Jumbo mortgages don’t adhere to certain standards set by Fannie Mae or Freddie Mac, lenders may impose stricter credit score requirements or higher debt-to-income ratios on borrowers to approve them for these types of loans.
Advantages of Conventional Mortgages
The primary advantage of taking out a Conventional mortgage is that it allows borrowers to qualify for larger loan amounts than they would be able to get through other types of financing programs such as Federal Housing Administration (FHA) or Department of Veterans Affairs (VA) loans. Additionally, because these types of loans adhere to certain standards set by Fannie Mae and Freddie Mac banks will often offer lower interest rates on them than on other types of financing programs such as Jumbos.
Disadvantages of Conventional Mortgages
One potential disadvantage of taking out a Conventional mortgage is that banks typically require buyers to put down at least 5% when purchasing a property using this type of financing program. Although some banks do allow buyers with good credit scores and sufficient income levels to put down less than 5%. Some properties might exceed FHFA loan limits, necessitating a Jumbo mortgage instead of a conventional one, regardless of credit score and income.
Applying for a Jumbo loan is like applying for a conforming mortgage, but requirements are typically stricter. Some of the specific Jumbo loan vs. conforming loan requirement differences are listed below.
- Credit score: For Conventional loans, a credit score of 620 is generally required, and for Jumbo loans, a score of 680 or higher is preferred. Lower credit scores may result in higher interest rates.
- Income: A higher loan amount will cause bigger monthly payments. Borrowers will need to earn more money to cover these payments. They should be able to show their lender evidence of regular income with both types of loans, but they will want to see more proof of income if borrowers are applying for a Jumbo loan.
- Down payment: For Jumbo loans on 1-unit homes, lenders will probably require more than 10% down. For second homes, investment properties, and 2 – 4-unit properties, clients may need to put down more money. The amount of the down payment may also depend on the loan amount and credit score.
- Debt-to-income (DTI) ratio: For most loans, including Conventional ones, borrowers must have a DTI of 50% or less. However, A&D Mortgage requires a DTI of 45% or less for Jumbo loans.
- Cash reserves: For a Conventional loan, borrowers will need to have up to six months of cash reserves. For a Jumbo loan, clients may need up to twelve months of cash reserves.
- Loan-to-value ratio: Jumbo loans are loans that are bigger than regular loans. They also have stricter rules about how much your house is worth compared to the loan amount. This is called the loan-to-value (LTV) ratio. To calculate your borrowers’ LTV, take their total mortgage amount and divide it by the appraised value or purchase price of the property, whichever is lower. Jumbo loans may require them to have an LTV of 80% (i.e., the loan is only for 80% of the price of their home). Some lenders may require an even lower percentage.
Brokers need to talk to their lender about what borrowers need to do to qualify for a loan. Home buyers should give the lender:
- Pay stubs
- Tax returns
- Bank statements
- W2 forms or 1099s
Sometimes loans take longer to approve because they must go through a manual underwriting process.
How do Interest Rates Compare Between Jumbo and Conventional Loans?
When you have borrowers who are considering a Jumbo loan, they might wonder if the interest rates are higher. The answer is that it depends. Lenders might charge more for Jumbo loans because they involve more money and more risk. However, Jumbo loans are very competitive with market rates, so the difference in interest rates is usually small (0.25% to 1%).
When Should Your Borrower Consider a Jumbo Loan Over a Conventional Loan?
If you have borrowers who need a loan that is higher than the government set limits, they should consider a Jumbo loan over a Conventional loan.
Here is a quick summary to help them decide:
Consider a Jumbo loan if your borrowers are:
- High income earners
- Extremely good credit
- Financing a luxury home
- Financing a home in a highly competitive area
Consider a Conventional loan if your borrowers are:
- Financing a home under the loan limit
- High credit score and want a lower monthly payment
- Low to moderate income earners
In conclusion, understanding both Jumbo and Conventional mortgages is essential when helping your clients make sound financial decisions when purchasing property. Both types have their own advantages and disadvantages so it’s important that your clients weigh those carefully before making their final decision about which type best suits their needs financially speaking. By helping them understand both options thoroughly before signing any contracts they’ll be able ensure they’re making an educated decision about their financial future!
