Jumbo Loans vs Conforming Loans - Buyer's Guide

You've finally saved up enough for a down payment on your dream home. Congrats! But before you start shopping for houses, you need to figure out what kind of loan you're looking for. 

Do you want a jumbo loan or a conforming loan? Both have their pros and cons, so it's important to do your research and speak to a mortgage professional before making a decision.

Jumbo loans are mortgages that exceed the maximum loan limits set by the government. This means that they come with higher underwriting standards and may require a larger down payment than conforming loans. However, jumbo loans can be easier to qualify for if you have strong credit and income.

If you are planning to buy a home over the coming months, it is important for you to do your research. Below we’ve provided a beginner’s guide to understanding the key differences between jumbo mortgages and conforming mortgages.

What is a jumbo loan?

A jumbo loan, also known as a jumbo mortgage, is a type of financing that exceeds the limits set by the Federal Housing Finance Agency (FHFA). Jumbo loans are used to purchase luxury homes or investment properties that are generally priced at $1 million or more as a good rule of thumb.

Since jumbo loans are not backed by the government, they typically come with higher interest rates than conventional mortgages. In addition, jumbo loans typically require a larger down payment and stricter qualification standards. However, for borrowers who can qualify, jumbo loans offer an opportunity to finance the purchase of their dream home.

What is a conforming loan?

A conforming loan is a type of mortgage that meets certain guidelines set for government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac. 

The main difference between conforming and non-conforming mortgage loans is the size of the loan. Conforming loans must be below a certain amount, which varies by location. In most cases, these loans are also subject to stricter underwriting standards than non-conforming loans. As a result, borrowers who might not qualify for a conforming loan may still be able to get a non-conforming loan.

Conforming loan limits in 2024

On December 14, 2023, the FHFA announced the baseline conforming loan limit for 2024 at $766,550, an increase from the baseline limit of $726,200 in 2023. However, the baseline conforming limit is the benchmark guidepost.

In higher-cost areas, the conforming limit is adjusted. Under the Housing and Economic Recovery Act (HERA), if 115% of the local median home value exceeds the baseline conforming loan limit, the applicable loan limit will be higher than the baseline loan limit up to a ceiling loan limit (CLL) that is 150% of the baseline amount. 

For 2024, that ceiling loan limit is $1,149,825 for one-unit properties, or 150% of the baseline conforming limit, in the higher-cost areas. This type of limit commonly comes into play in states like New York, California, and Washington.

You can find your county limit in the FHFA conforming limit list by county.

Underwriting requirements for jumbos vs conforming mortgages

While the general underwriting process for conforming and jumbo loans may be very similar, the requirements of the lender may vary for different items reviewed.

A borrower’s credit score shows the lender a borrower’s track record for making payments on time. Reviewing a mortgage applicant's credit report is a de facto standard for any loan, with minimum credit scores expected for different loan types, however mortgage lenders commonly require higher scores when buyers are applying for jumbo home loans.

Given jumbo mortgages are mathematically larger financing amounts, the incomes needed to justify the associated mortgage payments and overall repayment of the loan will be larger too. While a borrower with a low income, strong credit and high down payment may easily qualify for a conventional loan, they may not qualify for a jumbo.

Saving for a down payment is one of the most challenging things for homebuyers today given the trend of rising home prices. If you are applying for a jumbo loan, lenders will expect borrowers like yourself to put larger down payments as a percentage of purchase price. 

How do mortgage rates differ for jumbo vs. conforming loans?

The answer is it depends! Larger loan amounts for jumbos provide more risk to the lender, so in theory one might expect jumbo rates to be higher than conforming rates.

In practice though, jumbo rates are frequently lower relatively depending on the lender. Since jumbo borrowers are subject to tougher lending standards requiring higher incomes, higher down payments and higher credit scores, some lenders are willing to be more competitive with lower rates.

Are closing costs higher for jumbo mortgages?

Yes, closing costs when using a jumbo loan to purchase a home are typically higher. There are two key reasons for this: 1) higher origination costs, and 2) potentially higher mortgage taxes. 

First, since there is more scrutiny around a large loan size and more steps to assess the creditworthiness of the borrower, jumbo mortgages come with higher origination costs. Second, in some geographies where local governments levy a one-time mortgage recording tax based on the loan amount, a higher loan amount means more in taxes. A good example of this is the mortgage recording tax in New York.

What type of loan is right for you?

There are many different types of loans available, and it can be hard to decide which one is right for you. 

If you're looking to finance a high-priced home, a jumbo loan is a good option. However, you'll need to have great credit and a strong income in order to qualify. 

A conforming loan is another option, and it may be easier to qualify for than a jumbo mortgage. However, the interest rate on a conforming loan may be higher. Ultimately, the best way to decide which type of loan is right for you is to speak with a lender and compare the options available to you.

Wondering what your mortgage payment might be? Estimate payments based on different purchase prices and down payment amounts with Prevu's mortgage calculator.