In May 2017, the average cost of a single-family home in the United States reached $406,400.1 That’s just $17,700 shy of the conforming-loan limit—that is, the maximum mortgage eligible for purchase by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)—in most of the country. Loans above that limit—called nonconforming, or jumbo, loans—aren’t guaranteed by Fannie Mae and Freddie Mac and so typically have more-stringent credit requirements.
In 2009, jumbo loans made up just 5.5% of all mortgages originated by large U.S. banks;2 by 2016, that figure had jumped to 20.3%.3 Given their increased prevalence, it’s important to understand how these loans differ from their conforming counterparts:
- Interest rates: While jumbos once commanded higher interest rates than conforming loans, that’s no longer the case. In fact, today it’s not uncommon to find jumbo loans with interest rates as much as half a percentage point less. “Think of it as a volume discount—the bigger the mortgage, the more willing lenders may be to lower rates,” says Gabriel Moreno, managing director of home-lending products at Charles Schwab Bank.
- Down payments: Unlike conforming loans, for which lenders often accept as little as 5% down, jumbo loans typically require 20%. “Some lenders may accept less, but 20% is the industry standard,” Gabriel says.
- Qualifications: To reduce the likelihood of default, jumbo lenders often require above-average credit and a low debt-to-income ratio. In addition, lenders may require two years’ worth of financial statements, versus one for conforming loans.
- Mortgage insurance: Given the higher down payment and more-rigorous financial requirements, lenders often pay for private mortgage insurance themselves or waive the requirement altogether.
For borrowers able to choose between the two loan types, Gabriel says the decision often hinges on how they want to deploy their cash reserves. “Some might choose to put more money down in order to secure a conforming loan,” he says, “while others might prefer to hold that cash back for other opportunities.”
The bottom line: If you’re wondering which loan type to pursue, consider how each would impact your cash reserves.
1Median and Average Sales Prices of New Homes Sold in United States, U.S. Census Bureau, 03/2017.
2Rachel Louise Ensign, “Jumbo Mortgages Play Larger Role at U.S. Banks,” The Wall Street Journal, 07/04/2016.
3Robyn A. Friedman, “Attention, Jumbo-Mortgage Shoppers: Deals Ahead,” The Wall Street Journal, 08/23/2016.
What you can do next
- Check out for jumbo and conforming loans from Quicken Loans, Schwab Bank’s home lending provider.