Definition:
A jumbo loan is a type of mortgage that exceeds the loan limits set by Fannie Mae and Freddie Mac. These loans are used to finance high-priced properties that require borrowing more than conventional loan limits allow.
Example:
Ashley wants to buy a luxury home priced at $1.2 million. Since the amount she needs to borrow is above the conforming loan limit in her area, she applies for a jumbo loan to finance the purchase.
Explanation:
Each year, the Federal Housing Finance Agency (FHFA) sets a conforming loan limit—the maximum mortgage amount that Fannie Mae and Freddie Mac will back. In most parts of the U.S., that limit is around $766,550 (as of 2024), though it's higher in expensive housing markets. If you need to borrow more than that, you’ll need a jumbo loan.
Jumbo loans aren’t backed by government-sponsored entities, so lenders take on more risk. Because of this, qualifying for a jumbo loan usually requires:
- A higher credit score (often 700+)
- A larger down payment (typically 10–20%)
- Lower debt-to-income ratios
- More documentation of income, assets, and reserves
Jumbo loans can have fixed or adjustable interest rates and may come with slightly higher interest rates or stricter loan terms due to the added risk for lenders.
Why is Jumbo Loan Important in Real Estate Transactions?
Jumbo loans are important because they allow buyers to finance high-value homes that exceed conforming loan limits. For buyers, understanding the stricter requirements helps them prepare financially. For sellers, jumbo loan approval means the buyer is financially strong, which adds security to the deal. These loans are common in luxury markets or high-cost areas where home prices exceed typical lending limits.