LeoGlossary: Jumbo Loan
A type of loan that exceeds the limits of the Federal Housing Authority and is not eligible for Freddie Mac or Fannie Mae.
This is considered a non-conforming loan which means it contains no guarantee. In turn, these loans are harder to sell on the secondary market. There is a good chance the bank or financial institution which originates the mortgage will have to keep it on the balance sheet.
To compensate for this, the institutions often charge a higher interest rate to compensate for the lack of liquidity that comes from holding the loan. Fannie Mae and Freddie Mac enhance the mortgage market by providing liquidity through the purchase of mortgage loans, securitizing them, and selling them into the secondary market. The catch is they only deal with conforming loans.
Mortgage-backed securities play a big part in the mortgage market. Conforming loans are what is packaged into these securities, which makes jumbo loans typically ineligible. During the Great Financial Crisis, there was an exception made that allowed a certain percentage of MBS to include jumbo loans.
Jumbo mortgages come with their own unique underwriting requirements and tax structure.
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