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Understanding the Difference Between a Jumbo Loan vs. Conventional Loan – Our Guide

March 25, 2020 by Shannon Christenot

jumbo mortgage in Los Angeles

House prices in multiple areas in the U.S. continue to spike up, which is why home buyers are looking for alternative loan options as regular mortgages are no longer enough to finance their dream home. That’s where jumbo mortgages come into play, which covers for loans that exceed the limits set the by the enterprises in the housing market.

What is a Jumbo Mortgage?

Jumbo mortgages refer to any loans that are larger than the standard loan limits set by government-sponsored enterprises like Fannie Mae and Freddie Mac. Lenders are often at higher risk since jumbo loans are not backed up by a government agency and enterprises, which means that qualifying for one can be a tricky ordeal.

Jumbo vs. Conventional Loans

Both jumbo loans and conventional loans are not insured by a government agency, which means that it is run by private lenders. The primary difference is that conventional loans meet the standard limit amount set by government-sponsored agencies, while jumbo loans are not supported by Fannie Mae and Freddie Mac as it exceeds their conforming limits.

That means that it is up to the private lenders’ discretion to set their own regulations when issuing a jumbo loan to borrowers.

How Does a Jumbo Loan Work?

Jumbo loans are not something you apply for like conventional loans. Instead, you need to apply for a mortgage loan, but once the amount exceeds the government’s agreed limits, it is up to the lender to decide the amount of loan they can lend without any backing from government agencies.

Seeing as jumbo loans are kept on the lender’s own books, some also call it portfolio loans. Either way, lenders will conduct a strict evaluation on the borrower’s credit scores, debt-to-income ratios, and liquid assets.

Lenders also consider qualifying limits on student loans, minimum monthly credit card payments and other monthly expenses such as the property taxes, utility bills, tuition, groceries, and more. Seeing as jumbo loans are not securitized by Fannie Mae or Freddie Mac, it’s no surprise that borrowers will have to settle with higher rates.

Just like any other loans, the monthly payments largely depend on three factors:

  • The dollar amount of the loan
  • The years on the term
  • Interest rates

Meanwhile, the requirements to pass a jumbo loan includes the following:

  • Good or exceptional credit score of at least 700 to 720
  • Low debt-to-income ratio
  • At least two years of steady employment
  • Proof of income
  • Low loan-to-value ratio
  • Higher minimum down payment
  • Meet jumbo loan limits
  • Enough jumbo loan cash reserves

When determining whether you should consider a jumbo loan, you need to look at the amount you need to borrow and not the total price of the house. Qualifying for a jumbo loan doesn’t mean it’s in your best interest to apply for one as it often comes with higher interest rates.

Conclusion: Jumbo Mortgages as an Alternative When Other Loans Fall Short

When regular mortgages fall short, jumbo loans are the best option that allows even first-time homebuyers to buy the home of their dreams. It is also the easier choice compared to a conforming loan as you don’t have to piggy-back multiple mortgages at the same time, allowing you more flexibility when buying a home.

If you’re looking to take out a jumbo mortgage in Los Angeles, we are your best option. Call us on (818) 601-2231 today to see how we can help.

Filed Under: Home Loan Tagged With: California, Conventional loan, Jumbo mortgage, jumbo mortgage Los Angeles, Los Angeles, Mortgage Guide, Tips

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I have had the pleasure of working with Shannon for 8 years - her knowledge of the mortgage process and attention to clients is unparalleled. The Los Angeles market can be tricky with high dollar homes and unique income of the Entertainment Industry, but Shannon takes charge and leads everyone through to successful closings like clock work - cannot recommend her enough a true Rock Star in Mortgage world.read more
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Working with Shannon was a real pleasure. She was always available and got back to me promptly with any necessary information. I was able to refinance my mortgage at a rate considerably lower than another larger company quoted who I had started working with. I look forward to working with Shannon again and I highly recommend her to anyone looking for a competent and decent mortgage broker.read more
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As first time home buyers we had no idea what we were doing. We were pre-approved by a well known company but quickly discovered that we absolutely did not want to work with them for the actual mortgage. Shannon was recommended to us by a friend and I called on a Saturday morning. By Saturday evening we were well on our way to buying a house (we closed three days ago!). Shannon made navigating these foreign waters so easy, answering all of our newbie questions with patience and grace. Plus she got us a fantastic rate. We are so grateful for Shannon and can not recommend her enough. WE OWN A HOME!!read more
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It was wonderful working with Shannon! She is attentive, thorough, and intelligent. It was easy to communicate with her because she took time to hear and understand my goals and always responded quickly. I highly recommend her to anyone looking. The customer service she provides exceeds expectations by a long shot! Thank you, Shannon, for all your help!read more
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