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What are Jumbo Loans?

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As the word "jumbo" suggests, a jumbo loan is simply a bigger version of a regular loan; it is a loan for a greater amount of money than you could receive through a regular loan.

The FNMA and the FHLMC, popularly known as Fannie Mae and Freddie Mac, purchase the bulk of residential mortgages from individual lenders. These agencies, however, set a maximum value on any mortgage they will purchase. This limit changes every year to adjust to inflation, and as of January 2006, the limit is $417,000 for a standard-size home. Though they are private entities, Fannie Mae and Freddie Mac have a close relationship with the government, so most mortgage holders follow their practices, and thus, any loan over $417,000 qualifies as a jumbo loan.

Many lenders refer to jumbo loans as jumbo mortgages or non-conforming loans, but all three terms refer to the same thing. Conforming loans conform to Fannie Mae/Freddie Mac limits, so a non-conforming loan goes over the limit and thus becomes a jumbo loan.

Some lenders also offer so-called super jumbo loans. As you would expect, super jumbo loans are simply larger versions of jumbo loans. These loans do not reflect Fannie Mae/Freddie Mac limits, but generally, they offer more than one million dollars to the borrower. They operate in the same manner, albeit on a greater scale, than their jumbo brethren.

Keep in mind, however, that neither jumbo nor super jumbo loans are the norm in the United States. Jumbo loans comprise only a small percentage of the total number of loans in America. The $417,000 limit does mean, however, that jumbo loans are far more prevalent in states with high real estate costs (California in particular).

Next Page: Advantages of Jumbo Loans

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