Jumbo vs. Conventional Mortgages: What's the Difference?

You might need a jumbo mortgage to finance it if the next home you plan to purchase comes with a particularly steep price tag. These loans are often run into the millions of dollars. They finance luxury properties, as well as homes in highly competitive local real estate markets.

A conventional mortgage is more in line with the needs of the average homebuyer. A conventional mortgage is one that's not connected in any way with the government, such as because it's guaranteed or insured by the Federal Housing Administration (FHA), the Department of Agriculture, or the Department of Veterans Affairs. Conventional mortgages can be either "conforming" or "non-conforming."

Fannie Mae and Freddie Mac will purchase, package, and resell virtually any mortgage as long as it adheres to their “conforming loan” guidelines. These guidelines factor in a borrower’s credit score and history, debt-to-income (DTI) ratio, the mortgage’s loan-to-value ratio, and one other key factor: the size of the loan. These maximum figures are set by the government.

As of 2019, the national maximum for conforming conventional loans is $484,350 for a single-unit dwelling. This is up from $453,100 in 2018. More than 200 counties around the U.S. are designated as high-cost, competitive areas, however, and maximum loan limits in these areas can go up to $726,525 as of 2019. New York City, Los Angeles, and Nantucket are a few such locations.

[Important: Conforming loan limits are adjusted annually to keep pace with the average U.S. home price; when house prices increase, loan limits increase as well by the same percentage.]

Not all mortgages conform to these guidelines, however, and those that don't are considered conventional. These tend to be more difficult to qualify for than conforming mortgages because they're not backed by the government, so eligibility and terms are left to the lenders. They often cost less, however.

Conforming jumbo mortgages exceed $484,350 and are only available in certain U.S. counties. They fall outside conforming loan restrictions and won’t be backed by Fannie Mae or Freddie Mac, but many still adhere to the guidelines for “qualified mortgages” set by the Consumer Financial Protection Bureau.

Non-conforming jumbo loans are those that exceed the jumbo limit in their respective counties, as well as those that don't neatly fit into any other category. These might include well-off borrowers with unique needs. or interest-only mortgages that culminate in balloon payments, with the entire borrowed balance due at the end of the loan term.

Because jumbo loans aren’t backed by federal agencies as conventional mortgages are, lenders are taking on more risk when they offer them. You’ll face more stringent credit requirements if you’re trying to secure one.

• Proof of Income: Come prepared with two years’ worth of tax documentation or similar paperwork to prove that you have a reliable, consistent source of income. Lenders will also want to see you have enough liquid assets on hand to cover six months' worth of mortgage payments or more.
• Credit score and history: You'll generally need a credit score of at least 620 (considered “fair”) before a lender will approve you for a conventional mortgage, but there’s a very low probability that lenders will approve you for a jumbo mortgage if your credit score falls below 720.
• Debt-to-Income ratio (DTI): Your debt-to-income ratio (your monthly debt obligations compared to your monthly income) should be 43 percent or less to qualify for a conventional mortgage. Lenders will typically look for an even lower DTI for jumbo mortgages since the loans are so large.

• A conventional mortgage is one that's not connected in any way with the government, such as because it's guaranteed or insured by the Federal Housing Administration (FHA), the Department of Agriculture, or the Department of Veterans Affairs.
• Conventional mortgages can either conform to government guidelines or they can be non-conforming.
• Jumbo mortgages tend to fall outside conforming loan restrictions, typically because they exceed the maximum amount backed by Fannie Mae or Freddie Mac.