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.
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.
To become eligible for a conforming loan, you need to meet the following guidelines set by Fannie Mae and Freddie Mac:
A jumbo loan is a mortgage that exceeds the loan limits set by the FHFA. And because of this, they are not guaranteed by Fannie Mae and Freddie Mac.
As the name implies, jumbo loans involve a more substantial loan amount. This type of mortgage is used to purchase luxury homes or properties from competitive housing markets.
Due to its nature, lenders find jumbo loans risky and more challenging to sell. It also includes sterner requirements and application process. Nonetheless, with excellent credit health and sizable reserves, a jumbo loan can help you obtain a more expensive property than you could with a conforming loan.
Since jumbo loans are riskier and involve a more considerable loan amount, it's only reasonable for lenders to require stricter qualifications, such as:
In this article, we've talked about the differences between conforming and jumbo loans. So the question now is, which mortgage loan is better for you? Well, it depends on what you need.
If you want to purchase a luxury home or a property from high-cost areas, you might opt for a jumbo loan. However, make sure that your credit score is excellent and you have a high income.
If the house you want is just within the loan limit, you have a decent credit rating, and low-to-moderate income, then a conforming loan would be better for you.
Not sure if you qualify for a conforming loan or a jumbo loan? Talk with our mortgage broker at Ebenezer Mortgage Solutions to learn the available options for you. Call us today at (813) 284 - 4027.