What Is a Jumbo Loan?

Jumbo Loans: Overview, Pros and Cons, FAQ

Key Points

Jumbo loans exceed FHFA limits, meaning they can't be resold to Fannie Mae and Freddie Mac.
Securing a jumbo loan often requires a 700+ credit score, 10%-20% down payment, and multiple property appraisals.
While they're riskier for banks, jumbo loans allow borrowers to preserve cash for other investments.

Some of us have caviar tastes and a hot dog budget, but for others, a different lifestyle is the day-to-day reality. If you're one of these people, a jumbo loan might be an option to pay for your home -- whether you don't have the liquid funds for the purchase or you don't want to drain your savings. Read on to learn about jumbo loans and how they're used.

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Exterior of tan-colored mansion. — Image source: Getty Images.

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Many properties purchased using jumbo loans are one-of-a-kind homes that are unlikely to have high-quality comps for valuation purposes. Essentially, this means that if the bank forecloses on the home due to a loan default, it's difficult to determine if they could sell it for enough to cover the loan.

This risk can be mitigated somewhat for banks by securing multiple appraisals from different appraisers. But the market for extremely high-end homes works differently and independently of the primary housing market.

Jumbo loans generally aren't included in mortgage-backed securities due to the risk involved, but they do sometimes show up in private-label mortgage-backed security products. You may need to be an accredited investor to purchase them, but you may also be able to gain exposure through mutual funds or ETFs that contain mortgage-backed security products with jumbo loans.

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About the Author

Kristi Waterworth has been a contributing real estate and financial expert at The Motley Fool, covering real estate, investing, and personal finance topics, since 2020. Kristi has been interviewed by various TV media outlets and podcasts for her real estate investing expertise – from residential real estate to digital real estate and everything in between. Kristi’s journalist career spans over 25 years, and she has written about real estate investing, homeownership, and home construction specifically for the last decade. She was also previously a licensed Realtor and general building contractor before the Great Recession and housing market collapse. She holds a bachelor’s degree in American history from Columbia College in Missouri.

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