What You Need to Know

Conforming vs. Jumbo Loans

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ByChristopher Boston
Edited byCasie McCoskey
ByChristopher Boston
Edited byCasie McCoskey

Updated: October 17, 2023

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Buying a home is exciting, but choosing the right mortgage can be daunting. You'll likely come across two primary options: conforming and jumbo loans. Understanding their differences will help you on your homeownership journey, as your loan type can impact your down payment, monthly payments and even your interest rate. We'll dive into the requirements, interest rates and pros and cons of conforming and jumbo loans. Whether you're a first-time homebuyer or considering refinancing, you'll find practical advice to make an informed decision.

Conforming vs. Jumbo Loans

When considering a home loan, the terms "conforming" and "jumbo" might pop up, leaving you puzzled. Knowing the difference can save you money, time and stress. A side-by-side comparison gives you a clearer picture, helping you match a loan type to your financial situation and long-term goals. You can apply this information directly when negotiating loan terms or plotting your financial future. Check out our comparative table to help you make the most knowledgeable choice.

Comparison Area
Conforming Loan
Jumbo Loan

Loan Limits

Up to $726,200, or $1,089,300 in some high-cost areas.

Typically above $726,200. No upper limit.

Down Payment

As low as 3% with some programs.

Usually 20% or more.

Interest Rates

Generally lower due to government backing.

Might be higher due to increased lender risk.

Credit Score

More forgiving, minimums can be lower.

Typically requires a higher score, above 700.

Property Type

Mostly for primary residences. Some options for second homes or investment properties.

Offers more flexibility; can finance primary, secondary and investment properties.

When comparing jumbo and conforming loans, be aware that each has unique features, advantages and limitations. The better you understand these, the more confidently you can make a move when it's time to sign on that dotted line. Your home is a significant investment, so make sure you're setting yourself up for financial success.

Understanding Conforming Loans

Conforming loans are a popular choice for many homebuyers because they adhere to Federal Housing Finance Agency guidelines. In 2023, the standard loan limit is $726,200, but in high-cost locations like San Francisco or New York City, you can borrow up to $1,089,300.

What makes them attractive is their flexibility in repayment terms. You can opt for 15- or 30-year repayment plans and choose between fixed or adjustable interest rates. The application process for these loans is typically more straightforward because they are within preset limits. Crucial factors such as your credit score, income and down payment influence your eligibility and the interest rate lenders offer. These loans are also quite versatile — you can use them to purchase different types of properties, including single-family homes, condos and even multi-family units. Conforming loans provide a structured and often more accessible route for potential homeowners.

Pros and Cons of a Conforming Loan

Conforming loans come with several benefits. These loans often come with more manageable rates, and the approval requirements tend to be less stringent than jumbo loans. But don't get too caught up in the positives. It's also essential to consider the drawbacks, like borrowing limits, which can be a hindrance if you're eyeing a pricier home.

It's worth taking a moment to weigh the pros against the cons. The table below breaks down each aspect, giving you a more comprehensive view. This way, you'll be better equipped to decide if a conforming loan aligns with your financial and homebuying objectives.

Conforming Loan Pros and Cons

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PROS

  • Lower Interest Rates: With conforming loans, you often benefit from lower interest rates. This translates to reduced monthly payments and less interest paid over the life of the loan.
  • Easier Approval: Because these loans meet specific guidelines, lenders find them less risky. This often results in a simpler and quicker approval process.
  • Flexibility: Conforming loans can be used for various types of properties, including single-family homes, condos and multi-family units.
  • Government-Backed Options: Some conforming loans are backed by government agencies like Fannie Mae and Freddie Mac, offering extra protection and sometimes even lower rates.
  • Rate Locks: Many lenders offer the option to lock in your interest rate for a set period, protecting you against any future rate hikes.
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CONS

  • Borrowing Limits: Conforming loans have a maximum amount you can borrow, which is set yearly. It can restrict your options if you want to buy a more expensive property.
  • Private Mortgage Insurance (PMI): If your down payment is less than 20%, you'll typically have to pay PMI, an extra cost added to your monthly payment.
  • Rate Variability: If you choose an adjustable-rate mortgage (ARM), your interest rate — and therefore your payment — can increase in the future.
  • Closing Costs: The fees and costs of finalizing your mortgage can add up. While these are part of most home loans, they can be higher for conforming loans depending on the lender and your credit profile.
  • Strict Requirements: While they're generally easier to get than jumbo loans, conforming loans still require a decent credit score, stable income and a reasonable debt-to-income ratio.

By considering the positives and negatives of conforming loans, you're equipping yourself to make a thoughtful decision tailored to your financial needs and homebuying goals.

Understanding Jumbo Mortgage Loans

Jumbo loans are distinct from conforming loans because they exceed the federal loan limits of $726,200 for 2023. They're ideal for purchasing high-end properties, but since they aren't government-backed, lenders assume more risk. That may translate to stricter requirements like a robust credit score and a substantial down payment. Jumbo loans offer various repayment options, including fixed-rate and adjustable-rate terms. However, they're less forgiving of missed payments due to the higher risk for lenders.

Regarding property types, jumbo loans are versatile but come with property-specific criteria. For example, a primary residence's requirements may differ from those for a vacation home or investment property. The lack of government backing means that lenders set their own rules, making it critical for you to understand these details. Understanding these nuances can help you navigate the lending process more confidently and tailor your financial strategy to meet specific property requirements.

Pros and Cons of Jumbo Loans

Jumbo loans are attractive for homebuyers, especially if you're aiming for a high-end property. That's their primary benefit — they allow you to finance more expensive homes that exceed conforming loan limits. You can also find jumbo home loans with flexible terms and conditions, such as the types of properties you can purchase.

But don't get carried away by just the positives. For instance, jumbo loans often require a higher down payment and come with stricter eligibility criteria. It's vital to weigh these factors to make a fully informed decision. Let's move on to examine the pros and cons in detail.

Jumbo Loan Pros and Cons

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PROS

  • Higher Loan Amounts: Enables you to finance luxury or high-cost properties that conforming loans can't cover. Ideal for upscale neighborhoods or popular cities.
  • Flexible Property Options: Not restricted to primary residences — you can also purchase second homes or investment properties.
  • Possibility of Rate Choices: Offers the flexibility to choose between fixed or adjustable rates based on your financial standing and risk tolerance.
  • Interest-Only Payments: Some jumbo loans allow you to make interest-only payments for a certain period, which can improve your cash flow.
  • Tailored Customer Service: Due to the high value of the loan, lenders often offer personalized service, including dedicated customer support.
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CONS

  • Higher Down Payment: Requires a larger initial payment, often 20% or more of the property's value, which can financially burden borrowers.
  • Stricter Credit Requirements: A high credit score, typically above 700, is needed to show lenders you're a low-risk borrower.
  • Limited Lender Choices: Not all financial institutions offer jumbo loans, which can limit your ability to shop around for the best rates and terms.
  • Higher Interest Rates: Because government agencies don't back them, lenders might charge higher rates to offset the risk they're taking.
  • More Documentation Required: Prepare for a more rigorous application process with extensive documentation for income verification, assets and more.

Understanding the pros and cons of a jumbo loan helps you make a well-rounded decision that aligns with your financial goals and current situation. Take the time to assess both sides to ensure you're making a choice that will serve you well in the long run.

Conforming and Jumbo Loan Requirements

While conforming and jumbo loans share some basic requirements, the specifics can differ significantly. Think of them as two different routes to the same destination: homeownership. Each road has its own traffic rules, speed limits and road conditions. Knowing these specifics ahead of time can give you the upper hand, helping you tailor your application to better meet the lender's criteria. Let's get into the nitty-gritty details for each type of loan.

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    Credit Score

    A score of at least 620 is usually sufficient for conforming loans, while jumbo loans often require a score of 700 or higher. Regularly checking and improving your credit score well before you start shopping for a loan can set you up for more favorable terms.

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    Down Payment

    Conforming loans can sometimes allow a down payment as low as 3%, whereas jumbo loans generally require around 20%. A higher down payment can significantly improve your loan terms and may reduce your interest rate.

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    Debt-to-Income Ratio (DTI)

    Lenders typically prefer a DTI of under 43% for conforming loans. Jumbo loans can sometimes accommodate a DTI ratio up to 45%, but aiming low is always better. Consider paying off minor debts to improve your DTI before applying for any loan.

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    Property Type

    Borrowers commonly use conforming and jumbo loans for primary residences, but each has special programs for secondary homes or investment properties. Always be upfront about the property’s intended use to make sure you’re getting the right loan.

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    Documentation

    Expect to provide proof of income, employment and assets for both loan types. Jumbo loans might demand more extensive documentation, such as tax returns for two years and more substantial cash reserves.

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    Appraisal Requirements

    An appraisal is necessary for both conforming and jumbo loans to assess the property's value. Jumbo loans require a more thorough appraisal process, sometimes involving several. Ensure your property is well-maintained, as this can significantly influence the appraisal value.

These key requirements pave the way for wiser financial decisions. Whether you're leaning toward conforming or jumbo loans, having a good grasp of the necessities can significantly streamline the homebuying process.

Conforming and Jumbo Loan Interest Rates

Understanding how interest rates work for both conforming and jumbo loans is crucial because it directly affects your monthly payments and the total cost of your home. Both loans offer fixed and adjustable rates. The former, as its name implies, stays the same over the life of the loan, making budgeting predictable. Adjustable rates, however, can change, sometimes increasing your payments substantially.

Besides knowing the importance of interest rates in your mortgage journey, let's explore the factors that influence them. Finding more competitive rates for your loan, whether conforming or jumbo, can save you a significant amount over the life of the loan. Here are the factors to consider:

  • Inflation: A rising inflation rate generally leads to higher interest rates across the board, including on conforming and jumbo loans. Lenders want to ensure that the return on their investment keeps pace with the eroding power of money.

  • Federal Reserve Policy: The Federal Reserve sets short-term interest rates, which affects the general interest rate environment. When the Fed increases the federal funds rate, borrowing becomes more expensive, directly impacting mortgage interest rates.

  • Economic Indicators: Stock market performance, employment data and GDP growth can indirectly influence interest rates. For instance, a strong economy may signal rising interest rates as lenders capitalize on increased consumer spending.

  • Loan Duration: Generally, shorter-term loans like 15-year mortgages offer lower interest rates than 30-year loans. It incentivizes quicker repayments, reducing the lender's risk.

Don't underestimate the power of shopping around for the best rates. Given the range of factors that can affect them, even a slight difference can amount to a substantial sum over the life of the loan. Take your time, do your homework and make the choice that best suits your financial situation.

Conforming and Jumbo Loan Fees and Costs

After understanding how interest rates work, let's shift our focus to another important part of your loan: the fees and additional costs. Knowing these can prevent unpleasant surprises and keep you from stretching your budget too thin. If you overlook these costs, you may borrow more than you need or can afford.

Here are several fees to keep in mind:

  • Closing Costs: These are one-time expenses you pay when closing the loan. They apply to both conforming and jumbo loans but can be higher for jumbo loans due to the larger loan amount.

  • Private Mortgage Insurance (PMI): PMI is required for conforming loans when you put down less than 20%. This additional cost is uncommon in jumbo loans, which usually require a 20% down payment.

  • Loan Origination Fee: This is what the lender charges for processing your loan. It's a percentage of the loan amount and applies to both types of loans.

  • Appraisal Fee: An appraiser will assess your property's value. It's crucial for both loan types but may be more in-depth and costly for jumbo loans because the properties are often larger and more expensive.

  • Prepayment Penalty: Some loans charge you for paying off your loan early. It's less common in conforming loans, but you may find these clauses in some jumbo loan agreements.

Understanding the fees associated with jumbo vs. conforming loans can prepare you for the actual cost of borrowing. Being well-informed can help you set a realistic budget and make smarter decisions on which loan to choose.

Deciding Between a Conforming or Jumbo Loan

Both conforming and jumbo loans can help you buy a property, but choosing the right one is critical. So, how do you decide? Here are some questions to ask yourself:

  • What is your debt-to-income ratio? Understanding your debt-to-income ratio can help you get a clear picture of what loans you can comfortably afford. Lenders often use this metric to gauge your ability to manage monthly payments. A higher ratio could mean a riskier loan profile, potentially limiting your options to conforming loans with stricter requirements.

  • What's the price of homes in your area? Knowing the average home prices in your desired location can guide you toward the type of loan you should consider. If homes are generally priced above the conforming loan limits, looking into jumbo loans might be your best bet.

  • What are your long-term financial goals? Your long-term financial aims — like investing in other assets or saving for retirement — can impact the type of loan that's best for you. Conforming loans might offer lower interest rates, allowing you to allocate funds toward other investments.

Selecting a loan that doesn't fit your financial profile can lead to unnecessary expenses or even a loan denial. Consider your options carefully.

When a Conforming Loan Makes Sense

Conforming loans are generally easier to qualify for if you have a less-than-perfect credit score, thanks to the government backing that assures lenders that you will repay them. It could make conforming loans a more accessible choice for first-time homebuyers or those with limited credit history. However, if you have a robust financial profile, you might find better mortgage rates and loan terms for conforming loans.

If you're looking for a property in an area where home prices are moderate and fall within the conforming loan limits, a conforming loan is often the most straightforward and cost-effective option. You might also have access to a broader range of mortgage products, including various fixed and adjustable-rate options.

When Jumbo Loans Are a Better Fit

A jumbo loan can be a better fit when you're eyeing a luxury property or homes in high-cost areas where even a standard home exceeds conforming loan limits. You can borrow a larger sum of money in a single loan, allowing you to afford more expensive real estate. Since these loans are usually not government-backed, there's more room for negotiation, which might lead to more favorable loan terms for borrowers with strong financial profiles.

A high credit score and a low debt-to-income ratio will also play to your advantage in securing a jumbo loan since lenders need assurance that you'll be able to handle the larger payments. Choosing a jumbo loan opens the door to more upscale property choices and potentially more customizable loan structures.

Frequently Asked Questions on Conventional vs. Jumbo Loans

We answered questions borrowers typically ask when choosing between conventional and jumbo loans. These could provide deeper insights into the distinctions and help you make an informed decision.

What is the difference between a conventional loan and a jumbo loan?
Are jumbo loans non-conforming?
What is the purpose of a jumbo loan?
How do interest rates on jumbo loans compare to conventional loans?
What are the key requirements for a conventional loan?
Is a conforming mortgage better than a jumbo loan?
How do down payment requirements differ between the two loan types?
Are there different credit score requirements for jumbo and conventional loans?
What types of properties can I purchase with each loan type?
Can I refinance a jumbo loan into a conventional loan?

About Christopher Boston


Christopher Boston headshot

Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.


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