Conventional, Conforming, & Jumbo Loans: What’s The Difference?

If you’re looking to buy a home, you’ll likely come across a variety of mortgage options. A conventional loan, which refers to any mortgage loan that is not backed by the U.S. government, is the most common.

But there are various types of conventional loans, including conforming loans, which must not exceed the maximum loan amounts set by the Federal Housing Finance Agency (FHFA), and jumbo loans, which allow higher borrowing limits than permitted with conforming loans.

Let’s explore how these conventional loans work.

A conventional loan is any home loan that is not originated, guaranteed, or insured by the government. Instead, these loans are issued by private mortgage lenders, such as banks, credit unions, and other financial institutions. Conventional loans are the most common type of mortgage loan in the U.S., and they have been used to finance more than half of all new home sales for at least the last two decades.¹

Let’s say you’ve decided to apply for a conventional mortgage. Before you commit to a private lender, you may want to compare the different types of conventional mortgage loans, including conforming loans and jumbo loans. Doing so can help you determine which loan is the right fit for your financial situation.

A conforming loan is a type of conventional loan that must adhere to specific requirements set by Fannie Mae and Freddie Mac – two government-sponsored enterprises that purchase many of the mortgages issued by private lenders – and their regulator, the FHFA.²

For example, conforming loans must not exceed the maximum loan limit set each year by FHFA, which for 2023 is set at $726,200 for one-unit single family homes.³ However, conforming loan limits are higher in areas of the country where the median real estate value exceeds the baseline loan limit, including some counties in New York, California, and Hawaii. For 2023, the high-cost-area conforming loan limit on a one-unit home is $1,089,300, which is 150% more than the typical conforming loan ceiling.

In addition to abiding by maximum loan amount limits, to qualify for a conforming loan, lenders typically require borrowers to meet other eligibility requirements dictated by Fannie Mae and Freddie Mac, including minimum credit scores, down payments, and debt-to-income ratios (DTIs).

If your dream home is more expensive than the average home in your area, you may want to consider a jumbo loan. A jumbo loan is considered a “nonconforming” loan because it exceeds the conventional conforming lending limits set by the FHFA. With jumbo loans, homebuyers can borrow higher mortgage amounts than they are permitted with conforming loans.

Some lenders consider jumbo loans riskier because of the larger totals and because they are not backed or regulated by Fannie Mae, Freddie Mac, FHFA, or any other government agency. This means that qualification requirements for a jumbo loan may be stricter. For example, lenders might require homebuyers seeking jumbo loans to have:

• Higher incomes. Borrowers typically use jumbo loans to purchase luxury homes or houses in competitive markets. Because the price tags are higher – with some jumbo loans running in the millions – lenders may require borrowers to prove their income is high enough to cover monthly mortgage costs.

• Stronger credit scores. While the minimum credit score for conforming loans is typically 620, when it comes to jumbo loans, the higher the better.

• Lower debt-to-income ratio. Your DTI, the percentage of your monthly earnings that are used to pay off all debt obligations, is examined to determine how much you can afford to pay per month on your mortgage payment. In this case, the lower the better.

• Larger down payments. With a higher-priced home, expect to make a larger down payment. Even if the down payment is 20%, which is a common amount for conforming loans, consider that 20% of a $1,000,000 home will be significantly more than 20% of a $300,000 home.