You already know the primary difference between a conforming and a jumbo loan- it’s the maximum loan amount. In most parts of the country the conforming loan limit for 2019 is $484,350. Anything beyond that is referred to as a jumbo loan. Conforming loans are so-called because they conform to standards issued by mortgage giants Fannie Mae or Freddie Mac. The major difference between the two is simply the loan amount.
Yet while both are approved in much the same manner, there are some approval differences that need to be pointed out. This can be especially important if the sales price on a home is very close to either choice. Perhaps a home is listed at $600,000. With a 20% down payment the loan would be $480,000. With a 10% down payment, it would fall into the jumbo category.
One of the requirements relates to the loan compared to the value. Jumbo loans typically require the loan amount be at or below 80% of the value of the property. Conforming loans can have a loan amount up to 95% of the value of the property and in some instances, up to 97%. Why the difference? Private mortgage insurance, or PMI.
It used to be, up until the late 1950s, that mortgage lenders would cap the loan amount at 80% or lower. This extra equity cushion was needed should the loan go into default. Foreclosing on a property is costly for the lender and without this cushion lenders could be automatically “upside down” with a property, losing money upon sale. This meant home buyers had to come up with more money for a down payment, meaning buying later after saving more or being kept out of the home buying process altogether.
PMI on the other hand offered a solution. PMI would compensate the lender the difference between the buyer’s down payment and 80% of the value. If the buyers put down 10%, PMI would cover an amount that would compensate the lender the difference. Remember, PMI is indeed an insurance policy.
But there are no PMI policies available for jumbo loans, only conforming ones. This is a big requirement difference between the two.
This translates into a jumbo down payment of at least 20% of the sales price and borrowers with a 25% down payment get slightly better terms. There are programs where lower down payments are accepted but must be accompanied by secondary financing to keep the primary mortgage at 80% of the property’s value.
Another relates to credit scores. Conforming loans can require a minimum credit score ranging from 600-620. Jumbo loans on the other hand can ask for a minimum credit score of 700-740, depending upon the program.
Debt ratios, the percentage of debt compared to gross monthly income, are also a bit more restrictive with a jumbo loan. Conforming loans can accept debt ratios approaching 50, which means total monthly credit obligations approach nearly half of qualifying monthly income. Note however, when a lender approves a loan with such ratios, there will be other compensating factors in the file such as high credit scores, a large down payment, significant cash reserves and other positive features. Jumbo loans on the other hand will rarely approve a loan with such high debt ratios.
There can be other differences as individual jumbo lenders have the ability to require more documentation of income, employment and assets, but in general, these are the main difference you need to know about.