A jumbo loan is a non-conventional loan that major agencies, such as FHLMC and FNMA, won’t buy and trade because of the loan’s cost. When a lender offers a mortgage loan, they usually do not keep the mortgage loan for the duration of the time it takes you to pay the loan back. Instead, they sell the loan on the secondary market to agencies such as FHLMC and FNMA.

These two major institutions are very powerful in the mortgage market, and most lenders want to be able to sell mortgage obligations to them in order to free up cash or to obtain liquidity to do more business. Because a jumbo loan fails to qualify for Fannie Mae and Freddie Mac guidelines, borrowers must often pay extra to help lenders countenance the extra risk they encounter for financing it.

Jumbo loans were designed to help high-income individuals afford luxury homes or smaller homes in highly desirable areas. However, when home prices rise and houses become more expensive, more and more middle-income Americans have had to turn to jumbo loan financing to buy their dream homes.

As of 2021, in most areas of the country, loans above $548,250 are considered jumbo loans. However, if you live in certain regions in the country, you may be able to qualify for a conventional loan even if the cost of your mortgage exceeds this cap. In Guam, the US Virgin Islands, Alaska, and Hawaii, for example, borrowers may borrow up to 150 percent of the standard mortgage cap before their loan is considered a jumbo loan.