Jumbo Loan vs Conforming Loan: What’s the Difference?

Securing financing for your NYC dream home can be a journey full of ups and downs, but the more you know what to expect, the easier it is to navigate.

There are two specific types of mortgages that homebuyers turn to, especially for big-ticket properties in competitive markets: conforming loans and jumbo loans. You may find yourself asking “so what’s the difference between a jumbo loan vs. a conforming a loan?”. Understanding each type, how they benefit you, how they differ, and how to qualify, will help you understand which loan type to choose for your next home.

Jumbo vs Conforming Loans: What Are They And How Do They Affect The Homebuying Process?

Let’s dig into the specifics behind jumbo loans and conforming loans and how they affect the NYC homebuying process, starting with the basics.

What’s a conforming loan?

Conforming loans are the most commonly borrowed loans in America. In 2020, roughly 96% of mortgages were considered conforming loans.

An easy way to think about conforming loans is that they literally conform to the guidelines set by The Federal Housing Finance Agency (FHFA) each year. The most important (and discussed) guideline they set is the limit on how much someone can borrow in a conforming loan.

In 2022, the conforming loan limit on a single-unit home was set at $647,200 for most borrowers. In a region with a higher cost of living and more expensive real estate market, like New York City, the conforming loan limit is set higher — in 2022, that was $970,800.

Conforming loans are bought from lenders by Fannie Mae and Freddie Mac, the two government-sponsored entities that insure most U.S. mortgages. Fannie and Freddie also set guidelines that conforming loans need to meet, which are what you’ll need to follow in order to qualify for a conforming loan. More on that below.

What’s a jumbo loan?

Simply put, jumbo loans exceed the limits set on conforming loans. For higher-priced properties, like luxury condos and new developments, many homebuyers need to borrow higher amounts, and that’s where a jumbo loan comes in handy. Like any loan though, you need to pay back what you borrow. So be prepared for higher monthly payments to be part of that higher loan amount.

Lenders are taking a bigger risk when they lend jumbo loans as opposed to conforming loans. They don’t have the safety net set by Fannie Mae and Freddie Mac, meaning they set their guidelines themselves — often with stricter eligibility requirements. They also come with higher interest rates for the same reason. Jumbo loans are less common than conforming loans, too.

The five biggest differences between jumbo loans vs. conforming loans

Choosing a loan type isn’t as simple as answering the question “how much money do I need?”. There are many deciding factors, such as eligibility requirements, interest rates, and loan limits. Below we’ll outline the biggest differences between these two type of loans so you can better understand what’s best for you.

Loan amount

Obviously, as the name suggests, you’re going to be able to borrow a larger amount of money with a jumbo loan. That’s why homebuyers of all income levels choose them often, especially for higher-priced luxury properties.

In 2023, the country’s conforming loan limit is $726,200, or $1,089,300 in more competitive, expensive markets. Jumbo loans, on the other hand, are limited state by state and even county by county. Reach out to the NewDevRev team to get an expert opinion on how your potential jumbo loan may be capped in New York City, and whether it’s the right option for you.

Qualification

Any type of loan is going to come with eligibility requirements, but qualifying for a conforming loan is easier than qualifying for a jumbo loan. That’s because lenders need to set stricter rules and guidelines to make up for the inherent risk that comes with lending jumbo loans.

Eligibility requirements differ depending on the lender you work with, but they always include specifics around how much you’re putting down in a down payment, how much your loan amount is, what kind of credit score you have, and your debt-to-income ratio (the ratio that represents your monthly income vs. monthly expenses).

Interest rates

If the amount of interest you pay on your mortgage is important to you, then conforming loans are likely to provide better options — they typically carry a lower interest rate than jumbo loans. Like eligibility requirements, lenders often set higher interest rates as a way to protect themselves against the slightly higher risk that comes with lending jumbo loans. That said, it depends on the lender, so be sure to do your research and check specific mortgage rates and companies before making your decision.

Selection and quality

A jumbo loan gives you more money to work with than a conforming loan does. That means you’ll have a bigger selection with pricier homes that include modern amenities and features. A conforming loan still allows you to seek and find high quality homes, but they may take a little more digging with a stricter budget.

How to qualify for a jumbo loan

As stated above, it’s a little harder to qualify for a jumbo mortgage loan due to their stricter eligibility requirements. That’s because you’re borrowing a larger sum from the lender, and they don’t have the safety net provided to conforming loans by the FHFA.

So, how do you qualify? Well, lenders like to see solid credit and a healthy financial profile from their applicant so that they know you’ll pay them back, and are therefore less likely to be taking a big risk by lending to you.

They assess this through a number of factors, notably your credit score. While conforming loans are often borrowed by applicants with credit scores around 620 or higher, jumbo loans usually require a score in the 700s or higher. They also look at your employment and income history to make sure you’re not new to a role

In addition to providing hard documentation that proves your financial health via your credit score, debt-to-income ratio, and liquid savings, you’ll also need to think about your down payment. Instead of a conforming loan, where you can put down as little as 3% or 5% of a home’s price, jumbo loans require down payments of at least 10%. Down payment rules vary lender by lender, but you’ll probably also find some that require a down payment of around 25% or 30% of the home’s price.

How to qualify for a conforming loan

Like jumbo loans, conforming loans also come with requirements that examine your financial history — your credit score, debt-to-income ratio, employment, income, and down payment. In this case, though, you’ll be following nationwide eligibility guidelines set by Fannie Mae and Freddie Mac.

Most conforming loans come with a minimum required credit score of 620 in order to meet Fannie and Freddie’s guidelines. If you have a lower credit score, you might want to look into government-backed mortgage options from the FHA, VA, or USDA.

As specified above, the down payment requirements for conforming loans aren’t nearly as high as they can be for jumbo loans. A conventional, conforming mortgage for single-unit family home requires a down payment of at least 3-5% of the home’s price. A lot of lenders will offer you interest rate options depending on your financial health and how much you put down. So usually, the bigger your down payment, the better chances you have at getting a lower interest rate.

A big difference in jumbo loans vs. conforming loans is the way an applicant’s debt-to-income ratio is evaluated. Typically, this ratio shouldn’t exceed 45% in order to qualify for a conforming loan. Sometimes you might find a lender willing to allow up to 50%, but that depends on the shape of your other financial stats.

Tip: Not sure what your debt-to-income ratio is? You can calculate it yourself quickly and easily. Make a list of your monthly expenses, like credit cards, auto loans, student loans, personal loans, and any other mortgage payments you owe. (You don’t need to include medical bills, utilies, or rent payments.) Then, take that total amount and divide it by your monthly income. The answer is your debt-to-income ratio, represented as a percentage.

How do you know which loan type is best for you?

This is a question only you — and the numbers — can answer. Obviously, if your budget can only stretch so far with a conforming loan, then you may need a jumbo loan in order to purchase the high-end home you want. Run the numbers with our mortgage calculator to see where you land.

Usually, wherever you see million-dollar homes, like San Fransisco, New York City, and Los Angeles, there’s a good chance many owners used jumbo loans to buy them. That’s especially true in New York City, where homes aren’t necessarily jumbo-sized but their competition is.

If you’re more flexible and haven’t chosen a home you’re interested in yet, you have plenty of time to decide on a loan and budget that works for you. Start by taking the differences above into consideration and talk to some local professionals. A mortgage broker could help you run the numbers, and your NewDevRev expert can provide their input based on the thousands of transactions they’ve handled in New York City’s specialized real estate market.