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When you are ready to make a purchase, you are going to be faced with unique terms such as conforming and jumbo loans. So, what is a jumbo loan?

Home loans are classified in a wide variety of ways. They can be classified by the amount loaned, whether the interest rate can be adjusted or not, the length of the payback period and so on. A fairly common and simple term to understand is the jumbo loan.

A jumbo loan is simply a mortgage in excess of the amounts set by government backed agencies that buy or guarantee loans. Companies such as Freddie Mac, Fannie Mae, HUD and what have you will guarantee the purchase of a loan from a lender if certain conditions are met. A discussion of those conditions is beyond this article, but one of them is the amount being borrowed. Depending on the agency in question, the limit is roughly in the $417,000.00 area. If the amount you are borrowing is less than this amount, then it is known as a conforming loan. If you need to borrow more, the loan is known as a non-conforming loan or jumbo loan.

Jumbo loans are different from conforming loans in a number of ways. Since no government agency is guaranteeing them, they are considered riskier. If you fail to pay, the lender is stuck with the home instead of simply getting paid by Fannie Mae or some such group. The situation is also considered to have more risk because higher priced homes are generally harder to sell quickly. While this wasnt necessarily true in the recent hot real estate market, it is when things return to normal as they are now.

Given the higher risk from the perspective of the lender, you can expect to be treated a bit differently. In this case, lenders are going to charge higher interest rates than you would be able to get with a conforming loan. Before you panic, keep in mind we are talking about an 1/8 of 1 percent of a point in interest. For example, a conforming loan for $300,000 may have an interest rate of 6.125% percent whereas the same borrower will have to pay 6.25% percent if they borrow $800,000.

In many areas of the country, jumbo loans are pretty much the only way to go when borrowing money. Finding a home in Naples, Florida for less than $400,000 is not the easiest thing to do. In fact, jumbo loans make up the majority of mortgages in areas.