If you plan to purchase a home in Phoenix, AZ, you’ve likely been looking at current market rates. If the median prices make you double-take, then you aren’t alone! Housing across the US is rising, as are interest rates for many different mortgage options.
Market projections for 2023 are still being determined, as the current US economy and inflation rates are also uncertain. The upcoming return of student loan payments plays a significant role in the economy’s future, and most borrowers will know their new monthly payment amounts later this year.
If you’re looking to purchase a home in Phoenix, discussing the differences between conventional mortgages and jumbo loans is essential.
Difference #1: Loan Amounts
To understand the difference between these two types of loans, you must understand the concepts of conforming and non-conforming loans.
The conforming loan limit is the maximum amount that most mortgages can lend to home buyers. The limit for 2023 is approximately $726,200; the exact amount varies by regional market. Any loan amount below this limit is called ‘conforming,’ while anything higher is non-conforming.
Non-conforming loans can also refer to FHA loans and VA loans, which have specific regulations and requirements for homebuyers. Loans above the conforming limit are called “jumbo loans.”
Two organizations in the US are directly related to conforming loans: Fannie Mae and Freddie Mac. While these companies are bound by federal regulations laid out by the FHA, they aren’t government agencies. However, these companies are still responsible for helping manage the mortgage market, and one of their prime responsibilities is determining the annual conforming loan limit.
Difference #2: Requirements
Jumbo loans are high-risk loans for lenders, as any agencies don’t back them. The loss will be solely on the lender if the loans fall through, so they have heavier requirements for borrowers. Let’s take a look.
Down Payments
Jumbo loans are a more significant risk, requiring more from the home buyer. One of these is the down payment amount.
A conventional mortgage’s down payment can vary, but a good estimate is around 5% of the home’s purchase price. While individual lenders may have special offers, most jumbo loans require a minimum of 20% for the down payment.
Credit Score
Borrowers with good credit scores generally score better interest rates on their loans. Most conventional loans are flexible, with the Arizona market, in particular, averaging 620 for approval. However, jumbo loans are stricter, often requiring a minimum of 700 for approval.
Difference #3: Loan Details
Jumbo Loans and Conventional Mortgages also offer varying terms for buyers, and the process to qualify can be more complex to Jumbo loans.
Interest Rates
Conventional mortgage rates are highly competitive between lenders and are often lower than other loan amounts. However, jumbo loan interest rates are often higher due to the risk involved for lenders.
Underwriting
Fannie Mae and Freddie Mac set out guidelines for underwriting. Jumbo loans are non-conforming, so they follow their own guidelines. Underwriting is often fairly strict due to the high loan amounts and increased risk, often requiring more detailed documentation and scrutiny.
Mortgage Insurance
If borrowers put down under 20% on their loan, the lender will likely require private mortgage insurance. This protects the lender in case of default. Jumbo loans don’t have a standard requirement, leaving it to the lender. However, if there is a requirement for private mortgage insurance, the interest rates will often be higher than those protecting a conventional loan.
Choosing the Right Home Loan
Deciding which style of home loan is right for you can be a difficult process, especially if finances and math aren’t your strong suites. Luckily for Arizona buyers, you can work with a mortgage broker offering Jumbo Loans and conventional mortgages. Mortgage brokers can help you calculate what monthly payment you can actually manage in your budget as opposed to what you qualify for and will gather the best options available for your budget.
Jumbo loans offer buyers a way to cover higher home prices than the limit set by Freddie Mac or Fannie Mae, but higher loan amounts lead to more risk for lenders. Because of this, borrowers may face higher down payments and more scrutiny during the underwriting process.
With the current Phoenix market, the higher interest and scrutiny may be worth purchasing the home you want over the home that fits within conforming limits.
