What is a Jumbo Loan?

A jumbo loan, or jumbo mortgage, is a mortgage loan from a private lender that exceeds the loan amount for a conforming loan. A conforming loan is a loan that meets the requirements set out by Fannie Mae and/or Freddie Mac. Fannie Mae and Freddie Mac, as you may know, are government sponsored enterprises that buy mortgages from private lenders so that banks can have more liquid capital for originating more loans. In this way, these government sponsored corporations assume some of the risk of issuing a mortgage loan. To help protect themselves, Fannie Mae and Freddie Mac set limits on the types of loans that they will buy. Jumbo loans are mortgages that exceed the standards that Fannie Mae and Freddie Mac lay out, and therefore, these government sponsored enterprises will not purchase these loans.

While some banks do end up finding a buyer for jumbo loans (i.e. another private lender or investment bank), most jumbo loans are held by the bank that originates it. Such loans are called portfolio loans.

What does that mean to you as a consumer? Essentially, it means that if you want to take out a jumbo loan, you’ll pay higher interest rates - if you qualify at all.

In most of the U.S., jumbo mortgages are those that are above $417,000 (except in Guam, Hawaii, Alaska and the U.S. Virgin Islands, where the limit is $625,000). Also, in some areas where the housing prices are very high, such as Los Angeles and Seattle, the jumbo loan threshold is higher.

In addition to higher interest rates overall, jumbo loans also come with much stricter requirements. For instance, while it’s very common for conforming loans to be offered as 30-year fixed rate mortgages, most jumbo loans are adjustable rate mortgages. You’ll also typically be required to put down at least 20 percent for a jumbo loan. The bank will also require you to have a well-documented income, and for your monthly housing expenses to be no more than 38 percent of your income before taxes. You’ll also need a good credit score - 720 is a typical minimum, but it’s not uncommon for lenders to ask that jumbo loan borrowers have credit scores of at least 760.

The jumbo loan environment and market is highly volatile, and the rules and industry standards change every year. Be sure to seek sound financial advice and speak with several lenders before exploring a jumbo mortgage.