Conforming Loan vs. Jumbo Loan: Which One's Better For You?

Conforming Loan vs. Jumbo Loan

Buying a house is a huge financial decision. That's why it's important to have a comprehensive understanding of the homebuying process and its terms. Such terms include the "conforming loan" and "jumbo loan."

Conforming and jumbo loans are different types of conventional mortgages. Although both loan types are great, you should only choose the one that fits your lifestyle and financial needs.

So in this article, we will show you the difference between a jumbo loan and a conforming loan to help you decide which one's better for you.

What is a Conforming Loan?

Conventional loans are mortgages that are not backed by the government. Instead, they are insured by Fannie Mae and Freddie Mac, which, in turn, are regulated by the Federal Housing Finance Agency (FHFA).

Every year, FHFA sets new loan amounts based on the current market price of houses. Conforming loans, then, are the conventional mortgages that follow the limits set by the FHFA.

A conforming loan is a popular option for both lenders and homebuyers.

For homebuyers, conforming loans typically offer lower interest rates compared to other types of mortgages. So when you pay your monthly repayments, a more considerable portion of it goes to paying off the principal amount. In other words, you'll be paying less money over the life of the loan.

Moreover, the down payment required for conforming loans can be as low as 3% for first-time homebuyers and 5% for repeat borrowers. You'll also have more flexibility regarding the loan terms, which can be 10, 15, 20, or 30 years.

Now for lenders, conforming loans are preferred because they can be bundled with other loans and are easier to sell. And because of the PMI or private mortgage insurance, conforming loans also have a lesser risk for lenders.

The borrower needs to pay for PMI if their down payment is less than 20%. PMI usually costs between .5% to 1.5% of the mortgage loan amount. This amount can be paid upon closing, monthly along with your mortgage repayments, or both.

But the good thing is that if you give 20% down, the PMI will be canceled. The same thing happens if you reach at least 78% of your mortgage balance. Know more about PMI and how to avoid it.

Conforming Loan Requirements

To become eligible for a conforming loan, you need to meet the following guidelines set by Fannie Mae and Freddie Mac:

• Credit Score: You need to have a credit score of at least 620. The higher your credit score is, the lower interest rates you'll receive.
• Down Payment: First-time homebuyers need to give a 3% down payment, while non-first-time borrowers are required to put 5% down. Putting a 20% down payment will rid you of PMI.
• Debt-to-Income Ratio (DTI): The maximum DTI allowed is 45%. But some lenders would accept up to 50% if you have a high credit score and substantial cash reserves.
• Appraisal: At least one home appraisal is required for a conforming loan.
• Income and Assets: Conforming loans accept all types of income as long as they are stable and can regularly handle the monthly repayments. Additionally, some lenders would require you to have cash reserves. The documentation that you need to show includes:

• • Recent bank statements from the past 60 days
  • Federal tax returns from the last 2 years
  • W-2s and pay stubs from the last 2 years