Jumbo Loan vs. Conforming Loan

Today we’ll look at another common mortgage match-up: “jumbo loan vs. conforming loan.”

If you currently have a mortgage, or have been shopping for a mortgage, you’ve probably heard about both jumbo loans and conforming loans.

So what’s the difference?

Well, a conforming loan is a mortgage that meets the underwriting guidelines (credit, income, assets requirements) of Fannie Mae and Freddie Mac.

Additionally, the loan amount must be at or below the conforming loan limit, which is currently $729,750 in the highest-cost regions of the United States.

However, come October 1, it will drop to a maximum of $625,500, though the traditional conforming loan limit is $417,000.

Confused yet? You should be, considering the conforming loan limit has been messed with a lot ever since the mortgage crisis unfolded.

Mortgage Rates Cheaper for Conforming Loans

Put simply, mortgage rates will be cheapest for loans at or below $417,000, while loan amounts between $417,001 and $729,750 (soon to be $625,500), known in some circles as conforming jumbo loans, will be slightly higher.

This all has to do with risk – because conforming loans are guaranteed by Fannie and Freddie, there’s more demand for them on the secondary mortgage market.

As a result, interest rates will be lower.

Bankrate Daily Mortgage Rates

So what about jumbo loans?

Well, jumbo loans are mortgages that exceed the conforming loan limits, which I mentioned above.

As a result, they don’t adhere to Fannie and Freddie’s standard, and thus don’t come with that guarantee.

And so mortgage rates on jumbo loans will be higher – how much higher depends on the market.

Historically, the spread has only been a quarter to a half percentage point, but it widened to as much as two percentage points during the height of the crisis.

Currently, the spread between conforming and jumbo loans is less than half a percentage point. But it’s not just higher mortgage rates you have to worry about with a jumbo.

Getting a Jumbo Loan More Difficult

Qualifying for a jumbo loan is also much more difficult than qualifying for a conforming loan, as fewer banks and mortgage lenders offer them.

And you’ll likely need to come up with a higher down payment (we’re talking 20 percent plus) and have an excellent credit score.

(What credit score do I need to get a mortgage?)

Your loan program choices may also be more limited than those with conforming loans.

This explains why most homebuyers attempt to avoid the jumbo loan realm, either by putting down more or going with a combo loan, thereby keeping the first mortgage below the conforming limit.