Size

• The defining difference between a conforming mortgage and a jumbo mortgage is the size of the loan. Each year, the federal Housing Finance Agency updates the conforming loan limits, which specify the maximum mortgage size that Fannie Mae can purchase from lenders. When loans exceed this limit, the Fannie Mae will not buy the mortgage. For 2010, the general mortgage limit is $417,000. However, this limit is adjusted for areas that have higher housing prices.
  
  

Qualifications

• Lenders have higher standards for jumbo loans because lenders are loaning out more money and will more than likely have to keep the loan on their books for the term of the loan rather than being able to sell it. In order to qualify for a jumbo loan, you will need at least a 10 percent down payment, though lenders usually want a down payment of at least 20 percent. Lenders also look for a credit score of 720 or higher and verified income to prove you can repay the loan. Regular mortgages can have down payments below 5 percent and some banks will offer mortgages to subprime borrowers who have credit scores below 600.
  
  

Interest Rates

• Interest rates on jumbo loans will be higher than conforming loans because of the risk the lender assumes by issuing the loan, and because the lender has to keep the loan rather than selling it. In addition, jumbo loans are almost exclusively adjustable rate mortgages whereas conforming loans can have either an adjustable rate or a fixed rate.
  
  

Income Requirements

• Jumbo mortgages allow borrowers to spend a larger portion of their monthly income on mortgage expenses than traditional loans. According to Bankrate, traditional mortgages typically permit lenders to spend about 28 percent of their monthly income on the mortgage expenses. The limit increases to about 38 percent of monthly income for jumbo mortgages.
  
  

Warning

• Jumbo mortgages are higher risk for borrowers as well as for lenders because of the volatility of home prices, particularly those with higher values. For example, a 5 percent drop in the price of a $200,000 home only equates to a $10,000 loss of value. That same 5 percent drop in a $2 million home equates to a $100,000 loss of value. If your home equity drops below 20 percent because of a decrease in the housing market, you will have a very hard time refinancing your jumbo mortgage.