There hasn’t been a better time to snap up a home than 2020-21. Even the larger part of 2022, or the entire of it, will still be an ideal time to become a homeowner – largely depending on whether the Federal Reserve System will hike interest rates. For now, though, buyers are enjoying the lowest rates the country has seen in the recent past.
If you’re looking to get a mortgage, you have to start by identifying the mortgage that’s best for you. What if you’re on the fence between a jumbo loan and a conventional mortgage?
In this article, we’re fleshing out the difference between these two types of mortgages. In the end, you’ll be able to make an informed pick.
What’s a Conventional Mortgage?
In a nutshell, a conventional mortgage is a home loan that isn’t backed by the government. That’s to say, any mortgage that isn’t an FHA loan, VA loan, or USDA loan.
Conventional mortgages are the most common, accounting for about 65 percent of all mortgages. They’re offered by a wide range of private lenders, including local commercial banks, credit unions, and specialized mortgage banks.
Here’s the thing, though. There’s a limit to how much money you can borrow when you’re going for a conventional mortgage. In 2021, the conforming loan limit is $548,250 in most states.
Most lenders also require a credit score of at least 620. The minimum down payment is 3 percent of the property’s purchase price. Paying more than 20 percent can exempt you from the requirement to purchase private mortgage insurance.
What’s a Jumbo Mortgage?
Jumbo is a very large person or thing. In some parts of the world, especially Africa, jumbo is another name for elephants!
So, what’s a jumbo loan? They’re large-sized mortgages – larger than the conforming loan limit for conventional mortgages.
The qualification requirements are also different. For example, most lenders require a credit score of at least 680 and the minimum down payment ranges from 10-20 percent depending on the lender.
What’s the maximum you can borrow? There’s no fixed amount, really. If you’re a high-net-worth person looking to buy a multi-million home, for instance, you can discuss your needs with your preferred lender.
Another thing to note is that jumbo home loans aren’t as readily available as conventional home loans. Not many lenders offer jumbo loans, so you’ve to do your own research to find a suitable lender.
Jumbo vs Conventional Mortgage: Which Should You Choose?
This should be a simple decision to make. If you’re looking to buy a home with a price tag that’s greater than the current conventional conforming loan limit, you should go in for a jumbo loan.
That being said, just because you want a large home loan doesn’t necessarily mean you should apply for a jumbo loan. You have to ensure your personal finances are in order; otherwise, you could make an expensive mistake.
If you’re anything like most people though, and especially if you don’t qualify for a government-backed loan, a conventional mortgage will be your natural choice.
Explore our blog for more mortgage advice.