If you’re in the market for a jumbo loan, you might be wondering why there even is such a category of a jumbo mortgage. Why do lenders separate jumbo loans from other types of home loan programs?
That’s really a very good question and it relates to establishing some universal guidelines and creating liquidity in the mortgage market. So, then what exactly is liquidity? Liquidity provides mortgage lenders with sufficient capital to make mortgage loans on an ongoing basis. How so?
Let’s say there is a bank that has $1 million dollars to be used exclusively to finance a home. Now say the bank makes 10 separate $100,000 home loans. The bank is out of money and can no longer write new loans because there are no more mortgage funds available. In today’s marketplace, as long as that bank approved a mortgage loan using established lending guidelines that other banks follow, the loan could be sold to other investors, replenishing the banks’ funds.
Mortgage giants Fannie Mae and Freddie Mac by far make up the largest share of all mortgage loans issued today. These loans are approved using guidelines established by both which allow a mortgage lender to sell that loan to them or to other lenders. These general guidelines all follow the same set of requirements regarding income, employment, credit and cash to close.
Individual lenders can add additional requirements, referred to as “overlays” but in general, they all follow the same guidelines. One of these guidelines is the maximum conforming loan limit. Today, the maximum conforming loan limit is set at $806,500 except some locations listed below.
Any loan amount beyond that is considered a jumbo loan. Jumbo loans have their own set of guidelines lenders use but just like a Fannie or Freddie loan, as long as a lender approved a jumbo mortgage with the correct guidelines the loan can be sold as well.
When defining a jumbo loan, you first have to refer to the conforming loan limit. This is not a limit that is set arbitrarily but follows a predetermined policy. The conforming loan limit is set for the beginning of each year based on recent home values. In the third quarter of each year, the loan limit is set based on the national value increase from the previous year.
Lenders who issue jumbo lending guidelines and who buy and sell jumbo mortgage loans can also set their maximum loan limits. For example, a common maximum loan limit might be $2 million with a 20% down payment. Or, a lender could set a maximum loan amount of say $3 million with a 30% down payment. There are even loan program options for a jumbo loan with as little as 5% down by using a first and a second mortgage (80/15) to finance a transaction.
Finally, there are what is referred to as “high balance” conforming loan limits. High-balance loans are loans underwritten to Fannie Mae and Freddie Mac standards yet are available in areas considered “high cost” areas where the median home value is much higher than in some parts of the country like California, Florida, DC, New York, etc. The loan limit for these programs in 2025 is $1,209,750. Any loan beyond these limits in high-cost areas is considered a Jumbo loan. Buyers can read more about the current Jumbo loan qualifying requirements here.
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