Conventional loans are a very popular mortgage product because they offer a variety of options to borrowers. You can select the length of time you choose to pay off the loan (30 years is usually the most common choice), the down payment amount, and the interest type.
Conventional loans are also known as conforming loans. About half of all conventional loans conform to guidelines established by Fannie Mae and Freddie Mac. These are known as government-sponsored enterprises (GSEs) that buy mortgages from lenders and sell them to investors. This process makes mortgages more widely available. Any loan that doesn’t adhere to the GSE guidelines is referred to as a “non-conforming” home loan.
A jumbo loan is financing that exceeds the limits set by the Federal Housing Finance Agency. Jumbo loans can not be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac. These loans are designed to finance luxury properties in highly competitive local real estate markets. Jumbo loans come with unique requirements and tax implications.
The value of a jumbo mortgage differs by state and country. The FHFA (Federal Housing Finance Agency) sets the conforming loan limit. The new limit for 2020 was set at $510,4000 for most of the country.
If you are looking at a home that costs close to half a million dollars or more—and you don’t have that much money in your bank account—you would need a jumbo loan. Jumbo loans hold more credit risk for the lender because there is more money involved and Fannie Mae or Freddie Mac does not back them. Therefore, the credit requirements are more intense than homeowners applying for a conventional mortgage.
- Conventional loans are more popular with more options for the borrower.
- Half of the conventional loans conform to guidelines set by Fannie Mae and Freddie Mac to be backed by them.
- A jumbo loan exceeds the financial limits set by the FHFA and can’t be backed by Fannie Mae or Freddie Mac.
- Homeowners must go through more rigorous credit requirements than those applying for a conventional loan.
- Approval requires a fantastic credit score and a very low debt-to-income ratio.
What Loan is Best for You?
This all depends on where you are, both geographically and financially. If you are in a comfortable situation financially and live in a city where the cost of living is high, a jumbo loan may be ideal. However, if you’re starting, a conventional loan may be up your alley. It’s not about what loan is better than the other; it’s about what loan works for you. By talking it out with one of our loan officers are Community Lending of America, we can discover together which mortgage is the best fit for you.