There are several different types of conventional loans, but the most common are conforming loans.
Conforming loans are regulated by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Fannie and Freddie set the rules and requirements that lenders use to approve borrowers for conforming conventional loans.
"Conventional mortgage loans are offered by traditional private lenders, credit unions, and mortgage banks with proprietary products," explained Ralph DiBugnara, president of Home Qualified in New York City.
CONFORMING LOAN CRITERIA
- Credit score: 620 or higher
- Debt-to-income ratio (DTI): 45%
- DTI can be higher with an approved Automated Underwriting response
- Minimum down payment: 3%
Repayment terms for conforming mortgage loans can be 10, 15, 20, 25, and 30 years.
Related reading: How Much Cash Do You Need for a Conventional Loan Down Payment?
CONFORMING LOAN LIMITS
The Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, sets loan limits each year for how much lenders can approve borrowers for with a conforming conventional mortgage.
Loan limits are tied to median area housing prices, so they look quite different depending where in the country you're buying. In most areas, the conforming loan limit for a single-family home in 2022 is $647,200. However, the limit is higher in markets with more expensive homes. The maximum limit for a single-family home is $970,800.
But there are areas that fall between the floor ($647,200) and ceiling ($970,800). For instance, in 2022 the Denver-area loan limit is $684,250 for a single-family home. In Orange County, N.Y. it's $726,525.
Loans that are higher than the national limit of $647,200 but at or below the maximum $970,800 are called high-balance conforming loans.
Curious what the loan limit is in your area? Look it up on the FHFA's conforming loan limits map.
2022 CONVENTIONAL CONFORMING LOAN LIMITS
|Property type||Contiguous States; Washington, D.C. & Puerto Rico||High-cost areas, Hawaii, Alaska, Guam & the U.S. Virgin Islands|
Loans that exceed the conforming loan limits set by the FHFA are often called jumbo loans. In plain English, these loans are bigger than Fannie Mae and Freddie Mac loan limits for a given area.
For example, a home loan for $700,000 in Denver would be a jumbo loan, where the conforming loan limit is $684,250. Yet, in Orange County, N.Y you could get a conforming loan for $700,000 because the limit there is $726,525.
Clearly, whether you choose jumbo vs conventional/conforming depends a lot on your location.
Other non-coforming loans "break" other rules set by Fannie/Freddie. For instance, a "stated income" loan where the borrower does not verify income via documentation would be non-conforming because Fannie/Freddie requires all income to be documented.
But for our purposes here, you just have to know that a jumbo loan is non-conforming because it's above an area's Fannie/Freddie conforming loan limits.
Jumbo loans defined
A jumbo loan surpasses the conforming loan limits, allowing homebuyers to purchase costlier homes.
"If a loan amount exceeds $647,200 in most counties across the country, depending on where you live and what guidelines the FHFA has in place, you need a jumbo loan," said Lyle David Solomon, principal attorney with Oak View Law Group in Auburn, California. "This is because the government guarantees a portion or the entirety. With a jumbo loan, you typically need a higher credit score, a lower DTI ratio, and, in some cases, collateral or cash reserves."
Oftentimes, mortgage lenders will require borrowers to have at least a 680 credit score and they may require you to put down 10% or more.
Katsiaryna Bardos, chair of the Finance Department at Fairfield University, Fairfield, Connecticut, notes that jumbo mortgage loan borrowers are typically more affluent and financially stable, with many of these loans originating on the West Coast and in the Northeast, in some of the country's most expensive housing markets.
That distribution makes sense, given the steeper requirements. Ten percent down on a $3 million home is $300,000 - more than what the average home in the U.S. is worth, according to Zillow.
So you'd expect to see jumbo loans in areas where incomes and housing prices are high.
Where to find a jumbo loan
Many private lenders, traditional banks, and online lenders offer jumbo loans.
"Banks often like jumbo loans because of their high credit quality, short duration, and wider spread than other loans and securities," Bardos said. In other words, they tend to be lucrative and lower-risk.
Additionally, don't be surprised if you see jumbo loan rates lower than standard conforming loan rates. That's because banks like to lure high-net-worth individuals with attractive jumbo loan terms in order to gain their business for other financial products.
But that's not always the case. Many lenders will require higher rates and down payments. If you're interested in a jumbo loan but are wary of putting down 10%, shop around. Lenders can set their own criteria for jumbo loans, and they may have programs that allow you to put down less - particularly if you're in a medical profession.
Some physician loan programs allow recent medical school graduates, residents, surgeons, and a number of other physician types to buy high-value homes with less than 10% down.
Jumbo loans vs conforming loans: Which is better?
Deciding between a conforming loan or a jumbo loan really comes down to your homebuying needs and your financial qualifications.
"If you don't need a big, expensive home with unconventional terms attached to the loan, a conventional loan with rules set by the federal government is likely to be far more in your favor as a homebuyer," Solomon said.
Opting for a conforming loan gives you access to loans with as little as 3% down that allow you to use gift funds toward your down payment, reducing the amount of money you need upfront.
It may also be harder to qualify for a jumbo loan than a conforming loan.
|Conforming loan||Jumbo loan|
|Minimum credit score||620||680*|
|Minimum down payment||3% (for loans up to $647,200)||10%|
|Maximum debt-to-income (DTI) ratio||45% (may be higher in some cases)||45% (may be higher in some cases)|
*Can be lower, such as a 661 FICO score.
Again, lenders can set their own criteria. While one company might allow a jumbo loan down payment of less than 10%, another might not approve jumbo borrowers unless their credit scores are above 700 and they can show substantial cash reserves to cover the mortgage payment.
If you have significant savings, high income, and good credit, a jumbo loan can certainly expand your homebuying possibilities. You'll have access to a greater number of properties, likely in very desirable areas, and a better shot at getting a home with all of your desired amenities.
But just because you can qualify for a jumbo loan doesn't mean you should take the maximum amount offered.
"Just be careful when planning your home purchase," Solomon cautioned. "While you want to have a house that's big enough to last through your plans, you don't want one so big and fancy that you are wasting money."
As a bankruptcy attorney, he said he often observes clients getting in over their heads.
"Be responsible with your home loan decision-making and explore different options," he added.
Jumbo vs conventional loans (conforming) down payments
If you want a very low down payment on a higher loan balance, it might be tough to find.
Some lenders set their down payments as low as 5% for jumbo loans. Some require much more. But if you want to put less down, things get more complicated.
Fannie Mae and Freddie Mac only allow a 3% down payment on loans at or below $647,200 in 2022. Loans bigger than that, but below the local limit are considered "conforming high-balance" loans and are not eligible for 3% down.
The minimum down payment for a conforming high-balance loan is 5%.
For example, the high-balance loan limit in Orange County, N.Y. is $726,525. If you needed a loan for $700,000, you would need 5% down if you chose a conventional conforming loan. Your loan amount would have to be $647,200 or less to put 3% down, even in this high-cost area.
Because there's a lot on the line, jumbo lenders as well as Fannie Mae/Freddie Mac lean toward larger down payments for big loan amounts.
Fixed-rate vs adjustable-rate mortgages (ARMs)
Both conforming and jumbo loans offer the option of either a fixed interest rate or an adjustable interest rate.
But that wasn't always the case. After the late-2000s housing downturn, no lenders offered jumbo fixed-rate loans. You had to choose an ARM. Fortunately, fixed jumbo loans are plentiful today. But if the market returns to an ARM-only atmosphere for jumbo loans, they would still be worth considering.
Fixed-rate mortgages have their advantages, though. They have the same interest rate for the life of the loan. Your mortgage rate will never change, even if rates increase in the broader market.
An adjustable-rate mortgage (ARM) has a fixed rate for between three and 15 years, after which the rate adjusts up or down based on market rates. That means your monthly rate could go down - but it can also increase substantially.
"When interest rates are really low, as they are today, it's best to aim for a fixed-rate mortgage," Solomon said. "When rates are higher, it can be advantageous to choose an ARM that will go down when rates reduce."
Or you can aim for the best of both: "One strategy is to opt for an adjustable-rate mortgage and then refinance to a fixed-rate mortgage loan when interest rates go down," he said.
Non-conventional, a.k.a. government loans
Non-conventional loans refer to government-backed mortgage programs including VA, USDA, and FHA loans.
"Non-conventional loans often provide special benefits for borrowers, such as requiring a lower credit score and lower down payment and allowing a higher DTI ratio," said Solomon. "This is because the government guarantees a portion or the entirety of the loan, making the risk on the lending institution much lower."
Government-backed loans are great programs, but for the most part, they're not going to help you buy a high-value home. FHA loans also have loan limits, and they're lower in some cases than conforming loan limits.
USDA loans don't have loan limits, but borrowers must earn 115% of the area median or income or less to qualify, placing a natural constraint on how much home they can purchase. Additionally, USDA loans may only be used in qualifying rural and suburban areas.
The exception is VA loans. These mortgages are available to qualifying veterans, active-duty servicemembers, and eligible surviving spouses. VA borrowers who have full entitlement benefit available can buy homes with 0% down and no loan limits.
Their homebuying power is capped only by their finances, as lenders will use their income, savings, credit score, and DTI to determine how much they can borrow.
Generally speaking, though, you're not going to use a government-backed mortgage to buy a high-end home. You'll most likely use a non-conforming mortgage known as a jumbo loan.