Jumbo Vs. Conforming Home Loans: Which Is Right for You?
If you’re someone who is currently looking to buy a house, then you know that your monthly payment is called a mortgage. In order to be approved to purchase a particular house, you must get a loan through a mortgage company. When it comes to the types of loans that you can get, the options vary.
Today, we’re going to discuss two kinds of home loans that you can apply for. One is called a “jumbo loan”, while the other is known as a “conforming loan”. So, what’s the difference between the two? You’ve come to the right place. Let’s go with what a conforming loan is first.
What Is a Conforming Loan?
When you think about the word “conform”, what are the definitions that come to mind? To comply? To agree to a certain set of standards? To get into agreement? Well, when it comes to a conforming loan, what you are basically doing is making the decision to comply with the loan rules that are preset by Fannie Mae or Freddie Mac as it relates to credit, income and other requirements mentioned in their underwriting guidelines.
When it comes to the conforming loan’s limit, currently the traditional loan amount is $417,000 (anything outside of the limit is “jumbo”). However, due to the fact that the price of homes has dropped significantly but the loan limits have remained the same, this means that many houses are eligible for Fannie Mae or Freddie Mac financing. This is good news for many prospective homeowners because conforming loans tend to be about the cheapest way that a home can be financed. Just be sure to keep in mind that conforming loan limits have variations based on a particular property type. Basically, the more units there are on a property, the more the conforming loan limit will rise.
What Is a Jumbo Loan?
A jumbo loan is a home loan that exceeds the limits of a conforming loan. Therefore, because of that, they don’t fall under the guidelines of Fannie Mae or Freddie Mac. This also means that they don’t come with the same guarantees as the loans that do. Another point about a jumbo loan is that since the limit is much higher, so are mortgage rates (this fluctuates based on the state of the market at any given time). So, say for instance, that you’re looking at a house in Virginia. Especially when considering a jumbo home loan, you would need to check out the current VA home loan rates to see if it’s a wise decision for you.
Another challenge in getting a jumbo loan is that it tends to be more challenging to get approved for one. This is because there are not nearly as many mortgage lenders or banks that offer them as an option. Plus, your credit score will need to be in excellent condition and you’ll probably need to put around 20 percent down on the house before the loan is officially approved.
So, in asking yourself which loan is best for you, there are definitely several factors to consider. What can you afford? What amount of risk are you willing to take (in going the jumbo loan route)? What is your credit score and if you would prefer a jumbo loan, what amount of time are you willing to spend in looking for a company that will work with you?
All in all, it’s not really that there is a “right” or “wrong” answer here. It’s mostly a matter of what is the most realistic and practical option for your personal needs. Just make sure to consider what will make purchasing your home a pleasant experience, both personally and financially. After all, it is one of the most important investments you will ever make. Choose wisely.