Traditionally, conventional and jumbo mortgages are just two kinds of loans used by consumers to buy homes. They're similar in that the prospective homeowner must fulfill basic credit qualifications and maintain enough income to pay their monthly mortgage. The most significant difference between these two kinds of loans is the length of time it takes for homeowners to repay them. The conventional mortgage is almost always due for repayment within five years, while a jumbo mortgage is usually over fifteen years. Therefore, this makes it easier for young people who don't yet qualify for a traditional mortgage to get the jump on the housing market.
What's the difference
Even though they may be similar, there are specific differences between the two loans. For example, it's a lot harder to qualify for a jumbo mortgage. Furthermore, this means that those with perfect credit scores will have to pay a higher interest rate on loans. The reason for this is because lenders view those with poor credit scores as higher-risk borrowers. Those who own a home with poor credit scores will have a more extended period before they can buy a second home.
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On the flip side, there are many advantages to purchasing conventional loans. For one, it's much easier to obtain than jumbo loans. Even those who own homes with poor credit scores can apply for a traditional loan. Lenders also have more leeway when it comes to approving loan applications.
Best Mortgage Rates
In addition to having access to more conventional loans, borrowers also have access to cheaper mortgage rates. Those who own homes with poor credit scores can get competitive mortgage rates if they pick nonconforming companies to underwrite their mortgage documents. However, this means that borrowers need to shop around to find the best deal on a mortgage.
Another advantage of conventional mortgages is that they come with a fixed interest rate. Borrowers who can make reasonable payments on their loans will be able to lock in lower interest rates over the long haul. When rates begin to rise, they can expect to pay higher monthly payments until they end their loan term. However, with conventional loans, borrowers don't have to worry about falling behind on payments or accruing late payments fees.
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Lending Options
Conventional mortgages also come with several different lending options. FHA loans, made by the Federal Housing Administration, and the VA home loan program, both feature various lending options from which borrowers can choose. Some lenders limit the number of points that they will charge on loans. Others may offer a reduced interest rate or better loan limits.
What is the downside of a conventional loan?
The downside to these conventional loans is that they come with minimal competition. The FHA and VA programs and many government-backed loans are provided through the federal government. Because there is so much competition among lenders for these mortgages, borrowers must do their homework and carefully select the lender that best meets their individual needs. In many cases, it is a good idea for first-time homebuyers or those with little knowledge of the home market to work with a mortgage broker or other experienced professional. These individuals can help to pair a borrower with a lender that best suits their needs.
Conclusion:
Conversely, conforming loans typically offer lower interest rates than their conventional counterparts, and they come with longer loan terms. With a conforming loan, borrowers can enjoy the peace of mind that comes with qualifying for a federal loan while avoiding the stress of paperwork or the daunting task of finding the right lender. The FHA mortgage is yet another good choice for borrowers. To learn more about conforming loans, check out our Home Buyer's Guide.
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