The definition of jumbo loan varies from state to state, so when you begin your home buying process, you will need to research jumbo loans in your local area.
Generally, a jumbo loan is a non-conventional loan that major agencies, such as Freddie Mac or Fannie Mae, will not buy and trade because of the 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 Freddie Mac and Fannie Mae.
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. Since 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.