What is the difference between a conventional and a jumbo loan?

Conventional loans and jumbo loans are two different types of mortgage loans used to finance the purchase of homes. The primary difference between these two loan types lies in their loan limits, underwriting standards, and terms:

1. Loan Limits:

   • Conventional Loan: A conventional loan is a mortgage that conforms to the loan limits established by government-sponsored entities (GSEs) like Fannie Mae and Freddie Mac, these limits were $548,250 for most areas in the United States, although they can be higher in certain high-cost areas.
   • Jumbo Loan: A jumbo loan, on the other hand, exceeds the conforming loan limits set by the GSEs, any loan amount above $548,250 in most areas was considered a jumbo loan. Jumbo loan limits can vary by location and may be significantly higher in high-cost housing markets.

2. Underwriting Standards:

   • Conventional Loan: Conventional loans typically have more standardized underwriting criteria and may be easier to qualify for if you meet the lender's credit, income, and down payment requirements. These loans often require a credit score of at least 620, although higher scores can result in better terms.
   • Jumbo Loan: Jumbo loans generally have stricter underwriting standards due to the higher loan amounts involved. Lenders typically require higher credit scores, larger down payments, and lower debt-to-income ratios from borrowers seeking jumbo financing. Qualifying for a jumbo loan can be more challenging.

3. Interest Rates:

   • Conventional Loan: Interest rates on conventional loans are often lower than those on jumbo loans. This is because conventional loans are considered less risky for lenders, as they conform to standardized guidelines and are eligible for purchase by Fannie Mae and Freddie Mac.
   • Jumbo Loan: Jumbo loans tend to carry higher interest rates because they represent a greater risk to lenders. The larger loan amounts and more stringent underwriting requirements make jumbo loans less attractive to investors.

4. Down Payment Requirements:

   • Conventional Loan: Conventional loans typically require a down payment, which can vary but is often as low as 3% to 5% of the home's purchase price for borrowers with good credit.
   • Jumbo Loan: Jumbo loans often require larger down payments, which can range from 10% to 30% or more of the home's purchase price, depending on the lender's policies and the borrower's creditworthiness.

5. Loan Terms:

   • Conventional Loan: Conventional loans offer various loan term options, including 15-year and 30-year fixed-rate mortgages, as well as adjustable-rate mortgages (ARMs).
   • Jumbo Loan: Jumbo loans typically come with fixed-rate options and may offer fewer choices in terms of loan term length. Jumbo ARMs are also available.

6. Private Mortgage Insurance (PMI):

   • Conventional Loan: Borrowers who make a down payment of less than 20% on a conventional loan may be required to pay private mortgage insurance (PMI) until they build up sufficient equity in the home.
   • Jumbo Loan: PMI requirements for jumbo loans can vary by lender. Some lenders may require PMI, while others may offer alternative options like lender-paid PMI or higher interest rates in lieu of PMI.

It's important to note that loan limits and lending criteria can change over time,  If you're considering a conventional or jumbo loan, it's advisable to consult with a mortgage lender or broker for the most current information and to discuss your specific financial situation and needs.