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What are the Differences Between a Conventional Loan and Jumbo Loan?

What are the Differences Between a Conventional Loan and Jumbo Loan?

Depending on the type of property you are searching to purchase, you may have heard of a jumbo loan and a conventional loan. But what is the difference between a jumbo loan and conventional loan? The main difference is that a conventional loan is for a borrower who puts a down payment of 20%, while a jumbo loan is a specialty loan for those borrowers who are looking to purchase an expensive, luxury property. However, there are more detailed differences between both, to learn what they are, please read this explanation from Kingston Mortgage experts.

What is a Conventional Loan?

Simply put, a conventional loan is when the borrower puts a down payment of 20% and consequently not have private mortgage insurance.
However, to be considered as a conventional loan, the property price must be within the conventional loan limit.

What is the Conventional Loan Limit?

The conventional loan limit is $453,100. However, not all areas have the same cost of living. Some places are more expensive to live in than others, and their property prices reflect that. Examples of such high cost living areas are New York, Los Angeles and San Diego where property prices can easily reach $600,000 and $700,000. 
In such areas, the conventional loan limit is higher, up to $726,525.

What is a Jumbo Loan?

Jumbo loans are loans meant for luxury properties. What defines a luxury home varies by the county where you live. In general, a home will be considered as a jumbo loan if it is located in an area where the property value is above the conventional loan limit. However, it is important to remember that the conventional loan limit changes based on whether your county is considered as having a high cost of living.
As such, different mortgage lenders are approved for jumbo loans at different price points. Kingston Mortgage is able to work with jumbo loans up to $2.5 million.

What are Examples of Jumbo Loans?

As an example, Los Angeles County had an average home price of $607,490 as of August 2018. But Los Angeles is also a high cost area, therefore a home in Los Angeles will only be considered as a jumbo loan if the property value exceeds $625,500.

To compare, as of June 2018, Chicago had an average property value of $224,900. And Chicago is not considered as a county with a high cost of living, therefore a property will only be considered as a jumbo loan when the price for the home exceeds $453,100.

What is a Non-conforming Jumbo Loan?

There is a second kind of jumbo loan, and it is called a Non-conforming Jumbo Loan. Simply put, a Non-conforming jumbo loan is a loan only used for premium luxury homes. Therefore, this type of loan is not used for most borrowers, even if your county is considered to have a high cost of living.

A borrower interested in purchasing a home that falls under the category of a non-conforming jumbo loan will need to go through a special process to see if their loan is ultimately approved. They will need to submit extensive paperwork proving that they can afford a home of that price.

Different mortgage lenders have different levels as to what they consider to be a non-conforming jumbo loan. To give some perspective, Kingston Mortgage can work with non-conforming jumbo loans which start above $2.5 million and go up to $15 million.