​​Jumbo vs. Conforming Loans: 3 Differences to Make a Smart Decision

If you’re house shopping in a popular city or state, your lender might offer you a jumbo loan. Even if you’re not necessarily looking to buy a massive house, you might still need a jumbo loan to cover the cost of your home. While conforming loans are one of the most popular options on the market, they don’t work for everyone. If you’re confused about the difference between a jumbo vs. conforming loan, this post will cover the 3 critical factors that make them different.

Jumbo vs. Conforming Loan: 3 Differences

The main difference between a jumbo and conforming loan is the dollar amount. As their name suggests, jumbo loans are typically much larger than their counterpart.

When it comes to conforming loans, the Federal Housing and Finance Agency (known as the FHFA) sets certain loan limits. That means the FHFA doesn’t allow you to borrow above a certain amount — this is to protect buyers from predatory lending practices and to keep the financial market stable.

1. Greater Risk

A jumbo loan is a type of non-conforming loan, meaning the amount you borrow is typically above the FHFA limit. As a result, these loans are typically not guaranteed or insured. Let us explain how it works.

Fannie Mae and Freddie Mac are two FHFA agencies that invest in mortgage loans—and they typically buy conforming loans from your lender. But they cannot buy non-conforming loans, like jumbo loans. In fact, the lender is responsible for guaranteeing them so they take on a great degree of risk. When a person or organization guarantees a loan, they take on your debt if you end up defaulting on your loan.

On the other hand, a conforming loan has government backing—Fannie Mae and Freddie Mac will assume your debt if you default. Lenders take on less risk with these types of loans.

2. Stricter Guidelines

In many cases, providers will need to service a jumbo loan themselves instead of outsourcing it to another company. Since these lenders are taking on much more risk without any government guarantee, they need to be certain that you can pay back the loan. For that reason, the guidelines for these loans tend to be much stricter than for conforming loans. That means jumbo loans typically have high credit score requirements, high interest rates, and larger down payments.

However, conforming loans are much less risky for your lender, which translates to great benefits for you. You get to reap the joy of lower down payments, lower interest rates, and more relaxed requirements.

3. Higher Closing Costs

When you purchase a home with a jumbo loan, the closing costs are much higher. While costs for conforming loans typically amount to 3-6% of your home value, jumbo loan closing costs can go beyond 6%. This is in part because the loan is much larger and because there are extra steps involved in qualifying you for this mortgage.

Do I Qualify for a Jumbo Loan?

When considering the differences between a jumbo loan vs. conforming loan, you might have a general sense of which loan is right for you. But to make a proper decision, you’ll need more in-depth information on whether a jumbo or conforming loan meets your needs better. At Champions Mortgage, our loan officers are happy to answer your mortgage questions. Feel free to call our office at 855-853-1522.