Jumbo vs. Conventional Home Loans: What’s the Difference?

Are you looking to buy a house? Before you start daydreaming about purchasing your new home, you need to scrutinize which type of mortgage you’re going to use to buy it. There are two main types of mortgages to choose from: the conventional loan and the jumbo loan.

Mortgage lenders offer both of these types, and each can be used to finance the purchase of a home under different circumstances. Your finances and your ability to qualify for housing determine which type you can use to buy your house.

So, what’s the difference between a conventional loan and a jumbo loan? Let’s differentiate it. 

What is a jumbo loan?

A jumbo loan is a homeowner’s loan that is quite big to qualify for sale on the secondary market, which means it can’t be easily bought or sold by a bank, credit union, or other organization. While jumbo loans are intended for big-ticket items, they can also be used for personal purposes.

A jumbo loan is typically for more than $417,000. It is usually reserved for large commercial properties, such as a hotel or office building. In Texas, jumbo loans cannot be used to finance single-family homes priced at less than $417,000. Loans under this amount fall under conventional loan guidelines.

Jumbo loans are generally used to purchase more expensive properties without putting down a large amount of money out-of-pocket.

How to qualify for a jumbo loan?

Like most loans, jumbo mortgages have stricter requirements than conventional mortgages.

To qualify for a jumbo loan, you must have an excellent credit score, be able to pay the interest rate, and not have a high debt-to-income ratio. Your debt-to-income ratio refers to the total of all your monthly debts compared to your income.

You will also need to be approved by a bank or credit union that offers jumbo loans. These institutions have varying standards, so some may require a down payment of more than 20 percent, while others will accept less.

What is a conventional mortgage?

A conventional mortgage is a home loan, usually insured by the Federal Housing Administration offered and sold by banks and other local mortgage lenders. These loans are generally easier to qualify for and require smaller down payments, making them the most popular type of home loan.

Conventional mortgages are generally used by buyers purchasing homes at average prices, where down payments are required.

How to qualify for a Conventional Loan?

A conventional mortgage is easier to qualify for than a jumbo loan. Generally, buyers must have credit scores of at least 620 and debt ratios no higher than 43 percent. Applicants must also have proof of stable income and assets and a history of saving.

While you don’t need to put down a large out-of-pocket sum on a conventional mortgage, you will have to pay private mortgage insurance.

What is the difference between the two?

The main difference between a conventional and jumbo loan comes down to how much you can borrow and what kind of property you can buy.

Jumbo loans often require higher interest rates, larger down payments, and shorter terms. This is because jumbo loans are riskier to lenders than conventional loans. On the other hand, conventional home loans have more flexible lending requirements, so you can often borrow more with these loans than you can with a jumbo loan.

Let’s take a look at some other differences between the two types of loans:

Purpose

Conventional loans are meant for owner-occupied properties, while jumbo loans can be used to purchase both owner-occupied and investment properties.

Maximum LTV and Loan-to-Value (LTV)

The maximum loan-to-value is 80% with a conventional loan, while jumbo loans allow for LTVs up to 100%.

Time Frame

Jumbo loans generally have shorter terms than conventional loans.

Interest Rates

The interest rates on jumbo loans are generally higher than those for conventional loans.

Fees and Costs

Jumbo mortgages often come with higher fees and closing costs than conventional loans.

Both types of loans have their own pros and cons. So when it comes to choosing the best loan option, it’s essential to consult a loan expert to see which type works best for you.

Which type of loan is appropriate for you – a jumbo or conventional loan?

This depends on your individual situation and the type of property you want to purchase.

For example, if you’re looking for a home in Texas that costs more than $484,350 and you want a lower down payment and a shorter term, a jumbo loan might be for you.

On the contrary, if you wish to purchase a home in Texas that costs less than $484,350 and you can put down at least 20% of the purchase price, you might be eligible for a conventional loan.

One of the best ways to determine which type of loan is right for you is to contact a mortgage lender in Texas. A good loan professional will ask you questions about your financial situation, the type of property you want to buy, and how long you plan to keep it. They can then recommend the best loan for your needs based on this information.

Conclusion 

The main difference between a conventional and jumbo loan comes down to how much you can borrow and what kind of property you can buy. Conventional loans are meant for owner-occupied properties, while jumbo loans can be used to purchase both owner-occupied and investment properties. It all comprises your personal situation. Discuss your options with an experienced mortgage lender so you can pick the best option for your needs.