There are different mortgage plans available in the market and they can each have their own pros and cons. Some of the most versatile mortgage plans in the market are conventional loans because they can be molded to fit your needs, however, all loans have their limits and conventional loans have their limit as well, namely in the form of their approval amount.

All mortgage loans have an upper limit, they can’t be used for the purchase of properties that go beyond these prescribed limits. However, if you are looking for a property that has a market price above the limits of a conventional loan, then there is another loan you can consider and that would be a jumbo loan. Jumbo loans are mortgage plans that exceed the limits of conventional loans, they are an excellent choice for buying homes in high-cost areas.

Jumbo vs. conforming loan: what’s the difference?

To understand the difference between Jumbo and Conventional loans we have to first consider how the mortgage industry works.

Conventional loans are not sponsored by any federal office, this means that they are not guaranteed but, it is incorrect to assume that they are unregulated loans. Conventional loans are regulated indirectly thanks to the Federal Housing Finance Agency (FHFA) and Government-Sponsored Entities (GSE). The GSE companies are quasi-government companies, which means to some extent it is controlled by the government. The FHFA is responsible for creating guidelines for conventional mortgages and the GSE is responsible for purchasing these mortgage plans from lenders after they are closed. Selling these loans is beneficial to lenders and it acts as a security for them, because of this they structure the mortgage plans according to the FHFA’s guidelines. For this reason, conventional loans are also called conforming mortgages.

>>More:  Jumbo Loans: When a Regular Mortgage Isn’t Enough

However, there are also non-conforming mortgages in the market and these would be Jumbo loans. Jumbo loans are known as such because they exceed the guidelines of the FHFA since they are approved for very high amounts. Jumbo loans are riskier for lenders because they will not be purchased by the GSE.

Qualifying for a Jumbo mortgage

Jumbo loans and conventional loans are very similar and like other mortgage plans, they have the same basic requirements. However, because jumbo loans get approved for very high amounts in addition to carrying more risk for lenders, the requirements for qualification ask for more.

Credit Score: Credit scores are vital to the mortgage process because they imply a lot about how a borrower has handled their credit and payments, these are the same things the lender will be concerned about when considering whether to approve a mortgage or not. The credit score requirement for Conventional loans can start from 620 but since jumbo loans are meant for higher amounts, lenders require the borrower to have a higher credit score. But jumbo loans are also not offered by all lenders which means lenders might be willing to be flexible to a point, the credit score requirement of jumbo loans can start from a score of 660 and above.

Reserves: Cash reserves are one way that jumbo loans are different from conventional loans, this requirement is unique to jumbo loans. Lenders want to approve jumbo loans only to those borrowers who have the financial stability to handle the financial scope of jumbo loans. It’s not just the total loan amount that will be high but also the monthly payments. Because of this lenders have the requirement that the borrower has to show cash reserves that cover 12 to 18 months of jumbo loan installments, in a bank account. This amount will not be frozen or used, it is only a show of money as proof of financial ability.

Down Payment: Down payments are generally an indicator of the financial ability of borrowers and lenders actively encourage borrowers to make a minimum down payment of 20% by offering lower interest rates or showing flexibility in the terms of the mortgage. Just like with conventional loans, jumbo loans on average require a downpayment of 20% but it is also possible that lenders might ask for a minimum of 30%, although this is more likely dependent on the economic conditions. While both loan types might have an average down payment requirement of 20%, conventional loans can have lower rates, jumbo loans will not normally have down payments of less than 20%.

Underwriting: The underwriting process of Jumbo loans is more complex than the one for conventional loans. The underwriter goes into more details and combs the financial reports to make sure that nothing has been left to chance. Additionally, the underwriting for jumbo loans doesn’t take place once but twice. The reason for this double-check is to make sure that there is absolutely no room for error in the borrower’s finances and nothing has been missed that could become a potential issue.

Loan to Value ratio: Lenders usually only provide 80% or 85% financing on a property. The reason for this is the LTV or Loan to Value ratio. The LTV is calculated by dividing the property’s value by the amount the borrower requires a loan. The LTV indicates the amount of risk the lender is taking with a certain mortgage deal, which is why lenders prefer to keep it in check. Jumbo loan LTV does not go higher than 80%.

Closing costs on Jumbo loans

Closing costs in a mortgage involve the final payments the borrower has to make to complete the process from their end. These costs and fees are for all the additional processes involved in the mortgage process like title searches, insurance, inspections, underwriting, etc. The seller, borrower, and lender, all have their own closing costs to make at the end. For conventional loans, closing costs come up to 3% to 6% of the loan amount but jumbo loan closing costs will be higher because they involve additional processes like double underwriting and two appraisals. It is difficult to advise the exact amount for Jumbo loans because they exceed the limits of conventional loans and the additional processes involved depend on the situation and its requirements.

Call Now Button