Jumbo loan

Also called nonconforming loan

A mortgage larger than the conforming loan limit, so it cannot be sold to Fannie Mae or Freddie Mac and usually has stricter rules.

What it means

A jumbo loan exceeds the conforming loan limit, a dollar cap set each year by the agency that oversees Fannie Mae and Freddie Mac, with higher caps in some high-cost counties. Because these loans cannot be bought by those enterprises, lenders either keep them or sell them to private investors, and they set their own standards.

Lenders often want higher credit scores, larger down payments, lower debt-to-income ratios and several months of cash reserves. Rates may be higher or, at times, comparable to conforming loans. Jumbo loans tend to suit higher-income buyers in expensive housing markets.

Formula

M = P × r(1 + r)^n / ((1 + r)^n − 1)

M = monthly payment (principal and interest)
P = amount borrowed
r = annual interest rate ÷ 12
n = total number of monthly payments

Example

For example, a $900,000 jumbo loan at an illustrative 6.5% for 30 years has a principal and interest payment of about $5,688.61 a month, and about $1.15 million in total interest over the full term.

How it’s used

Buying in high-cost metro areas
Purchasing luxury or very large properties
Refinancing a large existing balance

Strengths and weaknesses

Strengths

Finances homes above conforming limits in a single loan
Available as fixed or adjustable
Rates can be competitive for strong borrowers

Weaknesses

Stricter credit, income and reserve requirements
Larger down payment often expected
More extensive documentation and sometimes a second appraisal

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.