MM Shorts: Jumbo vs conventional loans

Jumbo vs. conforming loan: what's the difference?

From big and small to high-interest and low-interest, mortgages come in all shapes and sizes. The two most common types are jumbo, or non-conforming, and conforming. To understand the difference between the two, let's touch on federal loan limits.

The Federal Housing Finance Agency(Opens Overlay) (FHFA) sets conforming loan limits annually. Loan limits determine whether mortgages are eligible for purchase by Fannie Mae and Freddie Mac. Mortgages that fall within these limits are considered conforming. Mortgages that fall outside these limits are considered non-conforming.

The government uses two businesses — Fannie Mae and Freddie Mac — to purchase conforming mortgages. That makes regular mortgages less risky for lenders to issue. But what happens when you need a house that costs more than the limit?

Some lenders will let you take out a jumbo mortgage. These are non-conforming mortgages used to finance mortgages over the FHFA loan limit. These mortgages are typically kept by the lender and are not guaranteed or insured, which makes them riskier. Every jumbo lender will have its own standards for making these loans.