What is the Difference Between Conforming and Jumbo Mortgages
Conforming and jumbo are the two major categories when it comes to mortgages, with the key distinction being based on loan size. Both also have different approval requirements, interest rates, and loan processing. Depending on the housing market value of where you live, you’ll be taking out one of these loan types when purchasing a new home.
What is a Conforming Loan?
A conforming loan meets the standards set by Fannie Mae and Freddie Mac. These are government-sponsored enterprises that buy mortgages from lenders. This keeps money flowing in the housing market.
- Fannie Mae usually buys loans from big banks.
- Freddie Mac focuses on smaller banks and credit unions.
These two don’t issue loans directly. Instead, they buy them, bundle them into mortgage-backed securities (MBS), and sell them to investors. This system stabilizes the housing market and supports affordable mortgage options.
To qualify as conforming, a loan must stay within the limit set by the Federal Housing Finance Agency (FHFA).
What is the Conforming Loan Limit?
The conforming loan limit is set by the FHFA each year based on the changing home prices across the United States. They do this by analyzing the data from the House Price Index (HPI), which tracks nationwide home pricing trends.
How the Limit is Determined
- Home Price Growth: The FHFA looks at the increase in home prices over the previous year. If the price increases, the loan limit increases to match the market.
- Baseline Limit Adjustment: The standard (baseline) conforming loan limit is adjusted based on the percentage increase in home prices.
- High-Cost Area Limits: In areas with higher home prices, the limit can go up to 150% of the baseline to accommodate the higher property values.
What is a Jumbo Mortgage?
A jumbo mortgage is any loan amount that goes beyond the FHFA’s conforming limit. These are common in places with high real estate prices. Because jumbo loans don’t qualify for purchase by Fannie Mae or Freddie Mac, lenders take on more risk. That leads to:
- Stricter credit and income requirements
- Higher down payments
- Possibly higher interest rates
Jumbo loans often require more financial documentation and take longer to process.
Differences Between Conforming and Jumbo Mortgages
| Feature | Conforming Loan | Jumbo Loan |
| Loan Size | Up to FHFA Limit | Above FHFA Limit |
| Interest Rates | Lower | Can Be Higher |
| Approval Process | Simpler | Stricter |
| Down Payment | Lower | Higher |
| Credit Requirements | Moderate | High Credit Score Needed |
| Availability | Nationwide | High-Cost Areas |
Choosing the Right Mortgage Loan
The right loan depends on the price of the home you want and where you live. If your home price is below the FHFA limit, a conforming loan is easier and cheaper to qualify for. If you're in a high-cost area or buying a more expensive home, a jumbo loan might be the only option.
Talk to the mortgage team at Community First Credit Union to figure out which loan type is right for you.
